<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

                                   (Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

               For the quarterly period ended: September 30, 2007

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

        For the transition period from _______________ to _______________

                        Commission file number: 001-31533

                           DUSA PHARMACEUTICALS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                         <C>
              New Jersey                                 22-3103129
    (State of Other Jurisdiction of         (I.R.S. Employer Identification No.)
     Incorporation or Organization)
</TABLE>

<TABLE>
<S>                                                       <C>
     25 Upton Drive, Wilmington, MA                         01887
(Address of Principal Executive Offices)                  (Zip Code)
</TABLE>

                                 (978) 657-7500
              (Registrant's Telephone Number, Including Area Code)

              ____________________________________________________
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):

   LARGE ACCELERATED FILER [ ] ACCELERATED FILER [X] NON-ACCELERATED FILER [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of November 8, 2007, the registrant had 24,076,110 shares of Common Stock, no
par value per share, outstanding.

<PAGE>

DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                           Page
                                                                          Number
                                                                          ------
<S>                                                                       <C>
PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

      -  Condensed Consolidated Balance Sheets at September 30, 2007
         and December 31, 2006 (Unaudited)                                   3
      -  Condensed Consolidated Statements of Operations for the
         three and nine-month periods ended September 30, 2007 and
         2006 (Unaudited)                                                    4
      -  Condensed Consolidated Statements of Cash Flows for the
         nine-month periods ended September 30, 2007 and 2006
         (Unaudited)                                                         5
      -  Notes to the Condensed Consolidated Financial Statements
         (Unaudited)                                                         6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                          23

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         41

Item 4.  Controls and Procedures                                            41

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                  43

Item 1A. Risk Factors                                                       44

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds        58

Item 3.  Defaults Upon Senior Securities                                    58

Item 4.  Submission of Matters to a Vote of Security Holders                58

Item 5.  Other Information                                                  58

Item 6.  Exhibits                                                           59

SIGNATURES
</TABLE>

Exhibit Index

EX-10(a) Amendment to the Marketing, Distribution and Supply Agreement dated
         September 26, 2007, between the Company and Stiefel Laboratories, Inc.
EX-31.1  SECTION 302 CERTIFICATION OF THE C.E.O.
EX-31.2  SECTION 302 CERTIFICATION OF THE C.F.O.
EX-32.1  SECTION 906 CERTIFICATION OF THE C.E.O.
EX-32.2  SECTION 906 CERTIFICATION OF THE C.F.O.
EX-99.1  Press Release


                                        2

<PAGE>

                                     PART I.

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,    DECEMBER 31,
                                                  2007            2006
                                              -------------   -------------
<S>                                           <C>             <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents                     $   1,004,387   $   3,267,071
Marketable securities available-for-sale         10,219,201      14,943,196
Accrued interest receivable                          82,762         158,374
Accounts receivable, net                          1,717,076       2,060,565
Inventory                                         3,430,296       2,343,472
Prepaids and other current assets                   965,743       1,535,819
                                              -------------   -------------
TOTAL CURRENT ASSETS                             17,419,465      24,308,497
Restricted cash                                     166,813         162,805
Property, plant and equipment, net                2,278,264       2,567,286
Goodwill                                          6,272,505       5,772,505
Deferred charges and other assets                 1,019,338         944,720
                                              -------------   -------------
TOTAL ASSETS                                  $  27,156,385   $  33,755,813
                                              =============   =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                              $     721,387   $     649,523
Accrued compensation                                599,112       1,674,470
Other accrued expenses                            2,975,167       3,841,891
Deferred revenue                                    468,741          57,270
                                              -------------   -------------
TOTAL CURRENT LIABILITIES                         4,764,407       6,223,154
Other liabilities                                 2,240,847       1,199,086
                                              -------------   -------------
TOTAL LIABILITIES                             $   7,005,254   $   7,422,240
                                              =============   =============
COMMITMENTS AND CONTINGENCIES (NOTE 16)
SHAREHOLDERS' EQUITY
Capital Stock
Authorized: 100,000,000 shares; 40,000,000
   shares designated
   As common stock, no par, and 60,000,000
   shares issuable in series or classes;
   and 40,000 junior Series A preferred
   shares.
   Issued and outstanding: 19,495,067 and
   19,480,067 shares of common stock, no
   par, at September 30, 2007 and
   December 31, 2006                            143,250,537     142,959,298
Additional paid-in capital                        5,466,745       4,320,625
Accumulated deficit                            (128,613,094)   (120,886,977)
Accumulated other comprehensive gain (loss)          46,943         (59,373)
                                              -------------   -------------
TOTAL SHAREHOLDERS' EQUITY                       20,151,131      26,333,573
                                              -------------   -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $  27,156,385   $  33,755,813
                                              =============   =============
</TABLE>

See the accompanying notes to the Condensed Consolidated Financial Statements


                                        3
<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                    SEPTEMBER 30,                SEPTEMBER 30,
                                              -------------------------   --------------------------
                                                 2007           2006          2007          2006
                                              -----------   -----------   -----------   ------------
<S>                                           <C>           <C>           <C>           <C>
Product Revenues                              $ 5,784,194   $ 6,062,720   $19,323,232   $ 17,432,350
Cost of Product Revenues                        1,573,897     2,849,485     5,506,540      7,635,407
                                              -----------   -----------   -----------   ------------
GROSS MARGIN                                    4,210,297     3,213,235    13,816,692      9,796,943
Operating Costs
Research and Development                        1,225,462     1,343,880     4,328,475      4,382,134
In-process Research and Development                    --            --            --      1,600,000
Marketing and Sales                             2,887,370     3,246,886     9,727,660      9,114,093
General and Administrative                      2,110,766     2,603,237     7,966,791      8,427,324
                                              -----------   -----------   -----------   ------------
TOTAL OPERATING COSTS                           6,223,598     7,194,003    22,022,926     23,523,551
                                              -----------   -----------   -----------   ------------
LOSS FROM OPERATIONS                           (2,013,301)   (3,980,768)   (8,206,234)   (13,726,608)
OTHER INCOME
Other income, net                                 135,519       194,129       480,117        645,707
                                              -----------   -----------   -----------   ------------
NET LOSS                                      $(1,877,782)  $(3,786,639)  $(7,726,117)  $(13,080,901)
                                              ===========   ===========   ===========   ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE   $     (0.10)  $     (0.19)  $     (0.40)  $      (0.77)
                                              ===========   ===========   ===========   ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING, BASIC AND DILUTED              19,495,067    19,449,442    19,487,594     17,041,197
                                              ===========   ===========   ===========   ============
</TABLE>

See the accompanying notes to the Condensed Consolidated Financial Statements


                                        4

<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                  SEPTEMBER 30,
                                                           ---------------------------
                                                               2007           2006
                                                           ------------   ------------
<S>                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                   $ (7,726,117)  $(13,080,901)
Adjustments to reconcile net loss to net
   cash used in operating activities:
Amortization of premiums and accretion of discounts
   on marketable securities available-for-sale                 (157,401)        38,766
Realized loss (gain) on sale of marketable securities,
   available-for-sale                                             2,533        (14,015)
Depreciation and amortization                                   512,471      3,302,624
Deferred revenue recognized                                    (481,051)            --
In-process research and development charge                           --      1,600,000
Stock-based compensation                                      1,146,120      1,413,116
Changes in other assets and liabilities impacting cash
   flows from operations (net of impact of acquisition):
   Accrued interest receivable                                  343,489        241,497
   Accounts receivable                                           75,612        259,100
   Inventory                                                 (1,086,824)       (79,271)
   Prepaid and other current assets                             570,076       (730,129)
   Deferred charges and other assets                            (74,618)      (793,082)
   Accounts payable                                              71,864     (1,310,300)
   Accrued compensation and other accrued expenses           (1,691,490)      (143,590)
   Deferred revenue                                           1,839,088        971,443
   Other liabilities                                             95,195            323
                                                           ------------   ------------
NET CASH USED IN OPERATING ACTIVITIES                        (6,561,053)    (8,324,419)
                                                           ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of cash received                (500,000)    (7,767,006)
Purchases of marketable securities
                                                            (12,560,937)    (4,008,844)
Proceeds from maturities and sales of marketable
   securities                                                17,546,115     21,176,393
Restricted cash                                                  (4,008)       (16,295)
Purchases of property, plant and equipment                     (223,451)      (172,277)
                                                           ------------   ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                     4,257,719      9,211,971
                                                           ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options                                40,650         40,956
                                                           ------------   ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS         (2,262,684)       928,508
                                                           ------------   ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              3,267,071      4,210,675
                                                           ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                 $  1,004,387   $  5,139,183
                                                           ============   ============
</TABLE>

See the accompanying notes to the Condensed Consolidated Financial Statements


                                        5
<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) BASIS OF PRESENTATION

     The Condensed Consolidated Balance Sheet as of September 30, 2007, and the
Condensed Consolidated Statements of Operations for the three and nine-month
periods ended September 30, 2007 and 2006, and Condensed Consolidated Statements
of Cash Flows for the nine-month periods ended September 30, 2007 and 2006 of
DUSA Pharmaceuticals, Inc. (the "Company" or "DUSA") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC") and in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). These condensed consolidated financial
statements are unaudited but include all normal recurring adjustments, which
management of the Company believes to be necessary for fair presentation of the
periods presented. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's operations
for any other interim period or for a full year.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2006 filed with the SEC.

     The Company has an accumulated deficit of $128,613,000 as of September 30,
2007. The Company has funded its operations primarily through public offerings,
private placements of equity securities and payments received under our
collaboration agreements. The Company expects to incur significant additional
research and development and other costs including costs related to clinical
trials. The Company's costs, including research and development costs for our
product candidates and sales, marketing and promotion expenses for any of our
existing or future products to be marketed by us or our collaborators currently
exceed and may continue to exceed revenues in the future, which may result in
continued losses from operations. The Company's net cash used in operations for
the nine-month period ended September 30, 2007 was $6,561,000, versus $8,324,000
used in the comparable 2006 period. At September 30, 2007, the Company had
approximately $11,224,000 of total liquid assets, comprised of $1,005,000 of
cash and cash equivalents and marketable securities available-for-sale totaling
$10,219,000. The Company estimates that existing cash and cash equivalents and
marketable securities, milestone payments associated with its international
marketing and distribution agreements, the settlement payment from River's Edge,
and the approximately $10.3 million of net proceeds raised subsequent to
September 30, 2007 in the private placement, see Note 17 Subsequent Events, will
be sufficient to meet our cash requirements for at least the next two years.

2) SIGNIFICANT ACCOUNTING POLICIES

     REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS
REVENUES

     The Company recognizes revenues in accordance with Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended
by SAB No. 104, Revenue Recognition. Accounting for revenue transactions relies
on certain estimates that require difficult, subjective and complex judgments on
the part of management.

     For revenues associated with contractual agreements with multiple
deliverables, the Company uses revenue recognition criteria outlined in
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin Topic 13,
Revenue Recognition ("SAB Topic 13") and Emerging Issues Task Force (EITF) Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. Accordingly,
revenues from contractual agreements are recognized based on the performance
requirements of those agreements. As


                                       6

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

prescribed by EITF 00-21, the Company analyzes each contract in order to
separate each deliverable into separate units of accounting and then recognizes
revenue for those separated units at their fair values as earned in accordance
with the SAB Topic 13 or other applicable revenue recognition guidance.

     PHOTODYNAMIC THERAPY (PDT) DRUG AND DEVICE PRODUCTS. Revenues on the
Kerastick(R) and BLU-U(R) product sales in the U.S. and Canada are recognized
when persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred, and collection is probable. Product sales
made through distributors, historically, have been recorded as deferred revenue
until the product was sold by the distributors to the end users because the
Company did not have sufficient history with its distributors to be able to
reliably estimate returns. Beginning in the first quarter of 2006, the Company
began recognizing revenue as product is sold to distributors because it believes
it has sufficient history to reliably estimate returns from distributors
beginning January 1, 2006. This change in estimate was not material to the
Company's revenues or results of operations. We offer programs that allow
physicians access to our BLU-U(R) device for a trial period. No revenue is
recognized on these units until the physician elects to purchase the equipment
and all other revenue recognition criteria are met.

     In January 2006, as amended in September 2007, the Company entered into an
exclusive marketing, distribution and supply agreement (the "Agreement") with
Stiefel Laboratories, Inc. ("Stiefel") for Levulan(R) PDT in Latin America (see
Note 12). Under the Agreement, Stiefel is required to purchase Levulan(R) from
the Company and make up front, milestone and royalty payments. Stiefel may
cancel the Agreement if there is a breach of contract, if either party files for
bankruptcy, if its sales during any year are less than its minimum purchase
obligations, or, as to Brazil only, if acceptable pricing approval, as defined
in the Agreement, is not obtained. No upfront or milestone payments are
refundable in any instance. Product shipments are subject to return and refund
only if the product does not comply with technical specifications. The Company
is obligated under the Agreement to provide multiple deliverables; the primary
deliverables being license/product distribution rights and commercial product
supply. Under EITF No. 00-21 the deliverables under the Agreement are treated as
a single unit of accounting, as the Company does not have evidence to support
that the consideration for the undelivered item, Levulan(R) units to be shipped,
is at fair value. Except during the launch phase when revenues are recognized
based on end-user demand, revenues from unit sales of Levulan(R) are recognized
upon product shipment. The Agreement establishes a fixed supply price per unit,
as well as a royalty based on a percentage of the net sales price to end-users.
Royalty revenues are recorded each quarter based on Stiefel's reported net sales
for that quarter. Royalties are included in product revenues.

     The non-refundable up-front payments will be recognized into revenues on a
straight-line basis commencing upon the first product shipments in a country
(see Note 12) over the remaining initial contractual term of the Agreement,
which is 10 years. The initial contractual term coincides with management's best
estimate of the product life cycle. Milestone payments based on cumulative units
shipped into a country will initially be deferred and then recognized on a
straight-line basis over the then remaining initial contractual term, with a
cumulative catch-up based on the number of years into the contract such
milestone is attained. As of September 30, 2007, in accordance with the
Company's policy of deferring revenues on new product launches, the Company has
deferred revenues of $110,000 related to product shipments of Levulan(R)
Kerastick(R) into Mexico and Argentina that have not yet been sold through to
the end user customers.

     On January 4, 2007, we entered into an exclusive marketing, distribution
and supply agreement with Daewoong Pharmaceutical Co., Ltd., or Daewoong, and
Daewoong's wholly owned subsidiary, DNC Daewoong Derma & Plastic Surgery Network
Company, and collectively with Daewoong referred to as D&D, covering current and
future uses of the Levulan(R) Kerastick(R) for PDT in dermatology. The agreement
grants D&D exclusive rights to distribute, promote and sell the Levulan(R)
Kerastick(R) in Korea, Taiwan, China, including without limitation Hong Kong,
India, Indonesia, Malaysia, Philippines,


                                       7

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Singapore, Thailand and Vietnam. We will manufacture and supply the product to
D&D from our facility in Wilmington, MA. The agreement has an initial term of
ten years (subject to earlier termination and extension provisions). Under the
terms of the agreement, D&D will make up to $3.5 million in milestone payments
to DUSA, $1.0 million of which was paid upon contract execution during the first
quarter of 2007 and another $1.0 million was paid subsequent to September 30,
2007 upon achieving regulatory approval in Korea. See Note 17 Subsequent Events.
The remaining milestones are based upon achievement of pre-determined cumulative
sales targets in the territory subject to certain terms and conditions. In order
to maintain its exclusive rights, D&D is obligated to purchase a minimum number
of units of the product and meet regulatory timelines. We will also receive a
minimum transfer price per unit plus a percentage of D&D's end-user price above
a certain level. The $1.0 million received during the first quarter of 2007 has
been deferred in its entirety and is included in other long term liabilities in
the accompanying condensed consolidated financial statements. We expect to
launch our product in Korea during the fourth quarter of 2007.

     NON-PDT DRUG PRODUCTS. The Company recognizes revenue for sales of Non-PDT
Drug Products when substantially all the risks and rewards of ownership have
transferred to the customer, which generally occurs on the date of shipment to
wholesale customers, with the exceptions described below. Revenue is recognized
net of revenue reserves, which consist of allowances for discounts, returns,
rebates, chargebacks and fees paid to wholesalers under distribution service
agreements.

     In the case of sales made to wholesalers as a result of incentives and that
are in excess of the wholesaler's ordinary course of business inventory level,
substantially all the risks and rewards of ownership do not transfer upon
shipment and, accordingly, such sales are recorded as deferred revenue and the
related costs as deferred cost of revenue until the product is sold through to
the wholesalers' customers on a first in, first out basis.

     The Company evaluates inventory levels at its wholesaler customers, which
account for the vast majority of its sales in the Non-PDT Drug Products segment,
through an analysis that considers, among other things, wholesaler purchases,
wholesaler shipments to retailers, available end-user prescription data obtained
from third parties and on-hand inventory data received directly from our three
largest wholesaler customers. The Company believes that this evaluation of
wholesaler inventory levels, allows it to make reasonable estimates for its
applicable revenue related reserves. Additionally, the Company's products are
sold to wholesalers with a product shelf life that allows sufficient time for
its wholesaler customers to sell its products in their inventory through to
retailers and, ultimately, to end-user consumers prior to product expiration.

     For new product launches where the Company does not have the ability to
reliably estimate returns, revenue is recognized based on end-user demand, which
is typically based on dispensed subscription data. When inventories have been
reduced to targeted stocking levels at wholesalers, and the Company has
sufficient data to determine product acceptance in the marketplace which allows
the Company to estimate product returns, the Company recognizes revenue upon
shipment to wholesalers, net of discounts and allowances. As of September 30,
2007, the Company deferred $303,000 in revenue related to the launch of
ClindaReach(TM), which occurred in March 2007.

     RETURNS AND ALLOWANCES - The Company's provision for returns and allowances
consists of its estimates of future sales returns, rebates and chargebacks.

     SALES RETURNS - The Company accounts for sales returns in accordance with
Statements of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition
When Right of Return Exists, by establishing an accrual in an amount equal to
its estimate of sales recorded for which the related products are expected to be
returned. The Company determines the estimate of the sales return accrual
primarily based on historical experience regarding sales returns, but also by
considering other factors that could


                                       8

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

impact sales returns. These factors include levels of inventory in the
distribution channel, estimated shelf life, product recalls, product
discontinuances, price changes of competitive products, introductions of generic
products and introductions of competitive new products. It is the Company's
policy to accept returns of Non-PDT Drug products when product is within nine
months of expiration. The Company considers all of these factors and adjusts the
accrual periodically to reflect actual experience.

     CHARGEBACKS AND REBATES - Chargebacks typically occur when suppliers enter
into contractual pricing arrangements with end-user customers, including certain
federally mandated programs, who then purchase from wholesalers at prices below
what the supplier charges the wholesaler. Since the Company only offers
"preferred pricing" to end-user customers under federally mandated programs,
chargebacks have not been significant to the Company. The Company's rebate
programs can generally be categorized into the following two types: Medicaid
rebates and consumer rebates. Medicaid rebates are amounts owed based on legal
requirements with public sector benefit providers after the final dispensing of
the product by a pharmacy to a benefit plan participant. Consumer rebates are
amounts owed as a result of mail-in coupons that are distributed by health care
providers to consumers at the time a prescription is written.

     The Company offers its wholesaler customers a 2% prompt pay discount. The
Company evaluates the amount accrued for prompt pay discounts by analyzing the
unpaid invoices in its accounts receivable aging subject to a prompt pay
discount. Prompt pay discounts are known within 15 to 30 days of sale, and
therefore can be reliably estimated based on actual and expected activity at
each reporting date. The Company records these discounts at the time of sale and
they are accounted for as a reduction of revenues. A summary of activity in the
Company's valuation accounts are as follows:

              FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2007:

<TABLE>
<CAPTION>
                                                                                 ACTUAL
                                      PROVISION RELATED TO   PROVISION FOR     RETURNS OR     BALANCE AT
                        BALANCE AT      SALES MADE IN THE    SALES MADE IN   CREDITS IN THE    SEPTEMBER
                       JULY 1, 2007      CURRENT PERIOD      PRIOR PERIODS   CURRENT PERIOD    30, 2007
                       ------------   --------------------   -------------   --------------   ----------
<S>                    <C>            <C>                    <C>             <C>              <C>
Accrued Expenses:
Returns and
   allowances            $705,000           $(16,000)             $--          $(189,000)      $500,000

Accounts receivable:
Prompt payment
   discounts             $ 17,000           $ 53,000              $--          $ (57,000)      $ 13,000
</TABLE>


                                       9

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

              FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007:

<TABLE>
<CAPTION>
                                                                                 ACTUAL
                        BALANCE AT    PROVISION RELATED TO   PROVISION FOR     RETURNS OR     BALANCE AT
                          JANUARY       SALES MADE IN THE    SALES MADE IN   CREDITS IN THE    SEPTEMBER
                          1, 2007        CURRENT PERIOD      PRIOR PERIODS   CURRENT PERIOD    30, 2007
                       ------------   --------------------   -------------   --------------   ----------
<S>                    <C>            <C>                    <C>             <C>              <C>
Accrued Expenses:
Returns and
   allowances            $632,000           $484,000              $--          $(616,000)      $500,000

Accounts receivable:
Prompt payment
   discounts             $ 23,000           $181,000              $--          $(191,000)      $ 13,000
</TABLE>

WARRANTIES

     The Company routinely accrues for estimated future warranty costs on its
medical device product sales at the time of sale. Our products are subject to
rigorous regulation and quality standards. Warranty costs were $25,000 and
$77,000 for the three and nine month periods ended September 30, 2007 compared
to $10,000 and $31,000, respectively, in the comparable 2006 periods, and were
included in cost of product revenues.

GOODWILL AND OTHER INTANGIBLE ASSETS

     Goodwill and intangible assets with indefinite lives are not amortized but
are reviewed annually for impairment or more frequently if impairment indicators
arise. Separable intangible assets that are not deemed to have indefinite lives
are amortized over their useful lives. The Company has adopted December 1st as
the date of the annual impairment test for goodwill.

SHARE-BASED COMPENSATION

     The Company adopted SFAS No. 123(R), Share-Based Payment, effective January
1, 2006, using the modified prospective application method, and beginning with
the first quarter of 2006, the Company measures all employee share-based
compensation awards using a fair value based method and records share-based
compensation expense in its financial statements if the requisite service to
earn the award is provided. In accordance with SFAS No. 123(R), the Company
recognizes the expense attributable to stock awards that are expected to vest in
the accompanying condensed consolidated statements of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 expands opportunities
to use fair value measurement in financial reporting and permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement is effective for fiscal years beginning after November 15,
2007. The Company will not early adopt the provisions of SFAS No. 159 and is in
the process of evaluating whether it will choose to measure any eligible
financial assets and liabilities at fair value.

     In September 2006 the FASB issued SFAS No. 157, Fair Market Measurements.
SFAS No. 157


                                       10

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

establishes a framework for measuring fair value and expands disclosures about
the use of fair value measurements and liabilities in interim and annual
reporting periods subsequent to initial recognition. Prior to SFAS 157, which
emphasizes that fair value is a market-based measurement and not an
entity-specific measurement, there were different definitions of fair value and
limited definitions for applying those definitions in GAAP. SFAS 157 is
effective for the Company on a prospective basis for the reporting period
beginning January 1, 2008. The effect of adoption on the Company's financial
position and results of operations have not been determined.

     In September 2006, Emerging Issues Task Force Issue No. 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements (EITF 06-4) was issued. EITF 06-4
requires the recognition of a liability for an agreement with an employee to
provide future postretirement benefits, as this obligation is not effectively
settled upon entering into an insurance arrangement. The provisions of this
standard are effective for years beginning after December 15, 2007. The Company
is currently evaluating what effect the adoption of EITF 06-4 will have on its
consolidated financial statements.

3) BUSINESS ACQUISITION

     On March 10, 2006, the Company acquired all of the outstanding common stock
of Sirius Laboratories, Inc. (Sirius) in exchange for 2,396,245 shares of
unregistered DUSA common stock and $8 million in cash. Pursuant to the terms of
the merger agreement, the actual number of shares that were issued in the
transaction was derived by dividing $17 million by the average closing price of
the Company's shares over the 20 trading day period prior to the close, or
$7.094 per share. For accounting purposes, these shares are valued at $7.30 per
share, the average market price of the Company's common stock over the five day
period beginning two days prior and ending two days subsequent to the public
announcement of the signing of the first amendment to the merger agreement.
Sirius is a dermatology specialty pharmaceuticals company founded in 2000 with a
primary focus on the treatment of acne vulgaris and acne rosacea. The merger
with Sirius has enabled DUSA to expand its product portfolio, capitalize on
cross-selling and marketing opportunities, increase its sales force size; as
well as, develop a pipeline of new products.

     The aggregate purchase price, net of cash received of $0.5 million, was
approximately $26.8 million, which consisted of $17.2 million in shares of
common stock, net of estimated registration costs of $0.3 million, $7.5 million
in cash, $0.3 million outstanding balance on line of credit, and transaction
costs of $1.8 million, which primarily consisted of fees for legal and financial
advisory services. Of the 2,396,245 shares issued in the acquisition, 422,892
shares have been placed in an escrow account established to secure the
indemnification obligations of the shareholders of Sirius as set forth in the
merger agreement. The escrow account is established for a period of two years
and will be used to satisfy liability claims, if any, made by the Company. No
amounts may be distributed from the liability escrow account unless and until
any individual claim exceeds $25,000 and cumulative claims exceed $100,000.


                                       11

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     The Company has agreed to pay additional consideration in future periods,
based upon the attainment of defined operating objectives, including new product
approvals or launches and the achievement of pre-determined total cumulative
sales milestones for the Sirius products over the period ending 42 months from
the date of close (but see below for the amendment to this provision). The
pre-determined cumulative sales milestones for the Sirius products and the
related milestone payments earned are, as follows:

<TABLE>
<CAPTION>
CUMULATIVE SALES MILESTONE:   PAYMENT EARNED:
       (in millions)           (in millions)
---------------------------   ---------------
<S>                           <C>
$25.0                              $1.5
 35.0                               1.0
 45.0                               1.0
                                   ----
   Total:                          $3.5
                                   ====
</TABLE>

     In addition, the merger agreement provides for the payment of three
milestones related to new product approvals and/or launches each in the amount
of $500,000 per milestone, or $1.5 million in the aggregate, if the milestones
are achieved. During the first quarter of 2007, the Company paid the first of
these milestones in the amount of $500,000 to the former shareholders of Sirius
related to the March 2007 launch of ClindaReach(TM). This payment has increased
goodwill in the accompanying Condensed Consolidated Balance Sheet. The Company
will not accrue contingent consideration obligations prior to the attainment of
the objectives. The maximum remaining potential future consideration pursuant to
such arrangements, to be resolved over the potential milestone period from the
date of close, is $4.5 million. If attained, the new product or launch portion
of the contingent consideration is payable in cash and the sales milestone
portion is payable in either common stock or cash, at the Company's sole
discretion. Any such payments will result in increases in goodwill at time of
payment.

     The acquisition was accounted for using the purchase method of accounting
and the results of operations of the acquired business since March 10, 2006, the
date of acquisition, were included in the results of the Company. The total
purchase consideration was allocated to the assets acquired and liabilities
assumed at their estimated fair values as of the date of acquisition, as
determined by management and, with respect to identified intangible assets, by
management with the assistance of an appraisal provided by a third-party
valuation firm. The excess of the purchase price over the amounts allocated to
assets acquired and liabilities assumed has been recorded as goodwill. The value
of the goodwill from this acquisition can be attributed to a number of business
factors including, but not limited to, expanded product portfolio, cross selling
and marketing opportunities, increased sales force and a pipeline of new
products.

     In connection with the license agreement between the Company and River's
Edge Pharmaceuticals, LLC, ("River's Edge") as described in Note 17 Subsequent
Events, the Company granted a perpetual, exclusive license to River's Edge to
manufacture and sell four products acquired from Sirius in connection with the
settlement of litigation with River's Edge. As part of the consideration for the
settlement, the Company will receive a royalty on net sales of those products,
including a guaranteed minimum royalty of $300,000, payable in equal annual
installments of $100,000 for three years. In connection with the license, DUSA
requested and received a waiver to certain obligations to promote these products
from the Sirius shareholder representatives acting on behalf of all of the
former shareholders of Sirius As consideration for the waiver, the Company and
the Sirius shareholder representatives agreed to amend the merger agreement to
extend the milestone termination date provided in the merger agreement by eight
(8) additional months and agreed that for the balance of the 50 month period
prior to the milestone termination date (as amended), DUSA will credit the
cumulative net sales milestone amounts under the merger agreement with a monthly
amount equal to the average of the last


                                       12
<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12-months of net sales by DUSA of the four products licensed to River' Edge.

4) GOODWILL AND INTANGIBLE ASSETS

     Under SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"),
goodwill and certain intangible assets are deemed to have indefinite lives and
are not amortized, but are reviewed at least annually for impairment. Other
identifiable intangible assets are amortized over their estimated useful lives.
SFAS No. 142 requires that goodwill be tested for impairment annually, utilizing
the "fair value" methodology. The Company has adopted December 1st as the date
of the annual impairment test for goodwill.

     At September 30, 2007, goodwill was $6.3 million and was all attributable
to the Non-PDT Drug Products operating segment (see Note 13). Amortization
expense related to intangible assets was $437,000 and $977,000 for the three and
nine-month periods ended September 30, 2006 and $0 for both periods in 2007.
Amortization expense is included in cost of product revenues in the accompanying
Condensed Consolidated Statements of Operations. Shortly after the closing of
the merger, the Company became engaged in patent litigation with River's Edge
Pharmaceuticals, LLC ("River's Edge"), a company that launched its
niacinamide-based product which is being substituted for our product, Nicomide.
River's Edge also requested that the United States Patent and Trademark Office,
or USPTO, reexamine the Nicomide(R) patent claiming that it is invalid. The
USPTO accepted the application for reexamination of the patent and the parties
have submitted their responses to the first office action. Although the court
issued a preliminary injunction against sales of River's Edge's product in May
2006, the injunction was lifted on March 7, 2007, due, in part, to the court's
determination that the reexamination process presented sufficient changed
circumstances to warrant the dissolution of the injunction. River's Edge
reentered the market with its product in competition with Nicomide(R). As a
result, in 2006 the identifiable intangible assets resulting from the Sirius
acquisition were determined to be impaired based on an analysis of the carrying
value and projected future cash flows of the assets. The impairment analysis
resulted in a write down of approximately $15.7 million in 2006, the then
remaining net book value of the intangible assets.

     Subsequent to September 30, 2007, the Company and River's Edge entered into
a settlement agreement related to the litigation involving Nicomide(R) (the
"Settlement Agreement"). The Settlement Agreement is further described in Note
17 Subsequent Events.

5) MARKETABLE SECURITIES

     The Company's investment securities consist of securities of the U.S.
government and its agencies, and investment grade corporate bonds, all
classified as available-for-sale. As of September 30, 2007, current yields range
from 2.5% to 6.2% and maturity dates range from October 2007 to October 2011.
The estimated fair value and cost of marketable securities at September 30, 2007
and December 31, 2006 are as follows:

<TABLE>
<CAPTION>
                                                                  September 30, 2007
                                                 ---------------------------------------------------
                                                                  Gross        Gross
                                                  Amortized    Unrealized   Unrealized       Fair
                                                     Cost         Gains       Losses        Value
                                                 -----------   ----------   ----------   -----------
<S>                                              <C>           <C>          <C>          <C>
United States government securities              $ 8,610,638     $74,284     $(27,674)   $ 8,657,248
Corporate securities                               1,561,620       2,664       (2,331)     1,561,953
                                                 -----------     -------     --------    -----------
Total marketable securities available-for-sale   $10,172,258     $76,948     $(30,005)   $10,219,201
                                                 ===========     =======     ========    ===========
</TABLE>


                                       13

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  December 31, 2006
                                                 ---------------------------------------------------
                                                                  Gross        Gross
                                                  Amortized    Unrealized   Unrealized       Fair
                                                     Cost         Gains       Losses        Value
                                                 -----------   ----------   ----------   -----------
<S>                                              <C>           <C>          <C>          <C>
United States government securities              $11,673,884      $112       $(51,687)   $11,622,309
Corporate securities                               3,328,685       295         (8,093)     3,320,887
                                                 -----------      ----       --------    -----------
Total marketable securities available-for-sale   $15,002,569      $407       $(59,780)   $14,943,196
                                                 ===========      ====       ========    ===========
</TABLE>

     The change in net unrealized gains and losses on such securities for the
three and nine-month periods ended September 30, 2007 was ($94,000) and
($106,000), respectively, as compared to ($57,000) and $(27,000) for the three
and nine-month periods ended September 30, 2006, and have been recorded in
accumulated other comprehensive income, which is reported as part of
shareholders' equity in the Condensed Consolidated Balance Sheets. Realized
gains (losses) on sales of marketable securities were ($10,000) and ($3,000) for
the three and nine-month periods ended September 30, 2007, respectively, as
compared to $0 and $14,000 for the three and nine-month periods ended September
30, 2006.

6) CONCENTRATIONS

     The Company invests cash in accordance with a policy objective that seeks
to preserve both liquidity and safety of principal. The Company manages the
credit risk associated with its investments in marketable securities by
investing in U.S. government securities and investment grade corporate bonds. In
addition, the Company is dependent upon sole source suppliers for a number of
its products.

     The Company is also exposed to concentration of credit risk related to
accounts receivable that are generated from its distributors and customers. To
manage credit risk, the Company performs regular credit evaluations of its
customers and provides allowances for potential credit losses, when applicable.
Concentrations in the Company's total revenues for the three and nine-month
periods ended September 30, 2007 and 2006, and accounts receivable as of
September 30, 2007 and December 31, 2006 are as follows:

<TABLE>
<CAPTION>
                          % OF REVENUE                      % OF REVENUE                 % OF ACCOUNTS
                        THREE MONTHS ENDED                NINE MONTHS ENDED             RECEIVABLE AS OF
                  -----------------------------   -----------------------------   ----------------------------
                  SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   DECEMBER 31,
                      2007             2006            2007            2006            2007           2006
                  -------------   -------------   -------------   -------------   -------------   ------------
<S>               <C>             <C>             <C>             <C>             <C>           <C>
Customer A               2%              4%              5%              6%              4%            14%
Customer B              14%             14%             12%             11%             15%            16%
Customer C              16%             27%             17%             19%             19%            17%
Customer D               7%              7%              6%              6%              8%            10%
Other customers         61%             48%             60%             58%             54%            43%
                       ---             ---             ---             ---             ---            ---
Total                  100%            100%            100%            100%            100%           100%
                       ===             ===             ===             ===             ===            ===
</TABLE>

     The Company is dependent upon sole-source suppliers for a number of its
products. There can be no assurance that these suppliers will be able to meet
the Company's future requirements for such products or parts or that they will
be available at favorable terms. Any extended interruption in the supply of any
such products or parts or any significant price increase could have a material
adverse effect on the Company's operating results in any given period.


                                       14

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7) INVENTORY

Inventory consisted of the following:

<TABLE>
<CAPTION>
                            September 30,   December 31,
                                 2007           2006
                            -------------   ------------
<S>                         <C>             <C>
Finished goods                $2,456,967     $1,425,131
BLU-U(R) evaluation units        126,845        166,812
Work in process                  305,369        257,358
Raw materials                    541,115        494,171
                              ----------     ----------
                              $3,430,296     $2,343,472
                              ==========     ==========
</TABLE>

     BLU-U(R) commercial light sources placed in physicians' offices for an
initial evaluation period are included in inventory until all revenue
recognition criteria are met. We amortize the cost of the evaluation units
during the valuation period to cost of product revenues to approximate their net
realizable value.

8) OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                    September 30,   December 31,
                                         2007           2006
                                    -------------   ------------
<S>                                 <C>             <C>
Research and development costs        $  358,074     $  458,792
Marketing and sales costs                158,765        314,770
Product related costs                  1,256,700      1,739,424
Legal and other professional fees        834,796        634,655
Employee benefits                        358,584        294,673
Other accrued expenses                     8,248        399,577
                                      ----------     ----------
                                      $2,975,167     $3,841,891
                                      ==========     ==========
</TABLE>

9) INCOME TAXES

     On July 13, 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under FIN 48, the amount of tax benefits recognized must
be the largest amount of tax benefit that has a greater than 50% likelihood of
being sustained upon audit by the relevant taxing authority. In addition, FIN 48
provides guidance on derecognition, classification, interest and penalties, and
accounting for interim periods and requires expanded disclosure with respect to
the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The cumulative effect, if any, of adopting FIN 48 is to
be reported as an adjustment to the opening balance of retained earnings in the
year of adoption.

     The Company adopted the provisions of FIN 48 on January 1, 2007. As of the
date of adoption, the total amount of unrecognized tax benefits is $1,800,000,
all of which, if recognized, would affect the effective tax rate prior to the
adjustment for the Company's valuation allowance. As a result of the
implementation of FIN 48, the Company did not recognize an increase in tax
liability for the unrecognized tax benefits because the Company has recorded a
tax net operating loss carryforward that


                                       15
<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

would offset this liability.

     The Company recognizes interest and penalties related to unrecognized tax
benefits in operating expenses. Since a full valuation allowance was recorded
against the Company's net deferred tax assets and the unrecognized tax benefits
determined under FIN 48 would not result in a tax liability, the Company has not
accrued for any interest and penalties relating to these unrecognized tax
benefits.

     Tax years ended December 31, 2003, 2004, 2005 and 2006 remain subject to
examination by major tax jurisdictions, which are Federal and the Commonwealth
of Massachusetts. However, since the Company has net operating loss and tax
credit carryforwards which may be utilized in future years to offset taxable
income, those years may also be subject to review by relevant taxing authorities
if utilized.

     The Company has performed an analysis of its changes in ownership under
Internal Revenue Code Section 382 and has determined that approximately
$5,400,000 of state NOL's are limited and unavailable to offset future taxable
income, resulting in a reduction of the related deferred tax asset and valuation
allowance of approximately $280,000.

10) SHARE-BASED COMPENSATION

     Total share-based compensation expense, related to all of the Company's
share-based awards, recognized for the three and nine-month periods ended
September 30, 2007 and 2006 included the following line items:

<TABLE>
<CAPTION>
                                       Three-months ended              Nine-months ended
                                 -----------------------------   -----------------------------
                                 September 30,   September 30,   September 30,   September 30,
                                     2007             2006           2007            2006
                                 -------------   -------------   -------------   ------------
<S>                              <C>             <C>             <C>             <C>
Cost of Product Revenues            $ 25,000        $ 24,000       $   75,000     $   61,000
Research and Development              94,000         101,000          280,000        263,000
Marketing and Sales                  115,000         123,000          134,000        270,000
General and Administrative           194,000         195,000          657,000        819,000
                                    --------        --------       ----------     ----------
Total share-based compensation
   expense                          $428,000        $443,000       $1,146,000     $1,413,000
                                    ========        ========       ==========     ==========
</TABLE>

     The weighted-average estimated fair value of employee stock options granted
during the nine month periods ended September 30, 2007 and 2006 was $1.99 and
$4.58 per share, respectively, using the Black-Scholes option valuation model
with the following weighted-average assumptions (annualized percentages):

<TABLE>
<CAPTION>
                                         Three-months ended       Nine-months ended
                                            September 30            September 30
                                       ---------------------   -----------------------
                                          2007        2006        2007        2006
                                       ---------   ---------   ---------   -----------
<S>                                    <C>         <C>         <C>         <C>
Volatility                               62.2%       63.7%       62.2%        63.7%
Risk-free interest rate                   4.7%        5.1%        4.5%         5.1%
Expected dividend yield                     0%          0%          0%           0%
Expected life-directors and officers   5.9 years   8.0 years   5.9 years    8.0 years
Expected life-non-officer employees    5.5 years   6.3 years   5.5 years    6.3 years
</TABLE>

     Under the Company's 2006 Equity Compensation Plan (the "2006 Plan"), the
Company may grant share-based awards in amounts not to exceed the lesser of: (i)
20% of the total number of shares of the Company's common stock issued and
outstanding at any given time less the number of shares issued and


                                       16

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

outstanding under any other equity compensation plan of the Company at such
time; or (ii) 3,888,488 shares less the number of shares issued and outstanding
under any other equity compensation plan of the Company from time to time. The
maximum number of shares of common stock that may be granted to any individual
during any calendar year is 300,000.

     The 2006 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The 2006 Plan provides for the grant of incentive
stock options ("ISO"), nonqualified stock options ("NSO"), stock awards, and
stock appreciation rights to (i) employees, consultants, and advisors; (ii) the
employees, consultants, and advisors of the Company's parents, subsidiaries, and
affiliates; and (iii) the Company's non-employee directors.

     Non-Qualified Stock Options - All of the non-qualified stock options, or
NSOs, granted under the 2006 Plan have an expiration period not exceeding seven
years and are issued at a price not less than the market value of the common
stock on the grant date. The Committee may establish such vesting and other
conditions with respect to options as it deems appropriate. In addition, the
Company initially grants each individual who agrees to become a non-management
director 15,000 NSOs to purchase common stock of the Company. Thereafter, each
non-management director reelected at an Annual Meeting of Shareholders will
automatically receive an additional 10,000 NSOs on June 30 of each year. Grants
to directors immediately vest on the date of the grant.

     Incentive Stock Options - All of the incentive stock options, or ISOs,
granted under the 2006 Plan have an expiration period not exceeding seven years
(five years for ISOs granted to employees who are also ten percent shareholders)
and are issued at a price not less than the market value of the common stock on
the grant date. The Committee may establish such vesting and other conditions
with respect to options as it deems appropriate.

     A summary of stock option activity for the nine month period ended
September 30, 2007 is as follows:

<TABLE>
<CAPTION>
                                                     WEIGHTED
                                        NUMBER        AVERAGE
                                      OF SHARES      EXERCISE
                                    (IN THOUSANDS)     PRICE
                                    --------------   --------
<S>                                 <C>              <C>
Outstanding at January 1, 2006         2,730,875      $11.58
Options granted                          414,000        3.30
Options forfeited                        (24,499)       7.48
Options expired                          (91,251)       6.70
Options exercised                        (15,000)       2.71
                                       ---------      ------
Outstanding at September 30, 2007      3,014,125      $10.66
                                       =========      ======
Exercisable at September 30, 2007      2,139,442      $12.33
                                       =========      ======
</TABLE>

     The weighted average remaining contractual term was approximately 5.11
years for stock options outstanding and approximately 4.24 years for stock
options exercisable as of September 30, 2007.

     The total intrinsic value (the excess of the market price over the exercise
price) was approximately $55,000 for stock options outstanding and $53,000 for
stock options exercisable as of September 30, 2007. The total intrinsic value
for stock options exercised in 2007 was $31,000.

11) BASIC AND DILUTED NET LOSS PER SHARE

     Basic net loss per common share is based on the weighted-average number of
shares outstanding


                                       17

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

during each period. For the periods ended September 30, 2007, and 2006, stock
options, warrants and rights totaling approximately 3,264,000 and 3,110,000
shares, respectively, have been excluded from the computation of diluted net
loss per share as the effect would be antidilutive. The 2,396,245 shares issued
in the Sirius acquisition, which includes 422,892 shares placed into a liability
escrow account, are included in the weighted-average number of shares
outstanding from the date of issuance, March 10, 2006.

12) STIEFEL AGREEMENT

     In January 2006, DUSA licensed to Stiefel Laboratories, Inc. ("Stiefel")
the exclusive Latin American rights to market Levulan(R) PDT. The agreement was
amended in September, 2007. The amendment reduced the milestone payments by
Stiefel from up to $3.0 million to up to $2.25 million. DUSA also manufactures
and supplies finished product for Stiefel, which the Company began shipping in
September 2007. In consideration for the transaction Stiefel agreed to pay DUSA
as follows: (i) $375,000 upon launch of the product in either Mexico or
Argentina; (ii) $375,000 upon receipt of acceptable pricing approval in Brazil;
(iii) two installments of $375,000 each for cumulative end-user sales in Brazil
totaling 150,000 units and 300,000 units, and (iv) two installments of $375,000
each for cumulative sales in countries excluding Brazil totaling 150,000 units
and 300,000 units. Stiefel launched the product in October 2007 in Mexico and
Argentina. DUSA is currently deferring and recognizing approval and sales
milestones as license revenues on a straight-line basis, beginning on the date
the milestone is achieved through the first quarter of 2016, which is DUSA's
best estimate of the end of the useful economic life of the product, which also
coincides with the contractual term of the Stiefel Agreement. During the third
quarter of 2007, DUSA's product sales of Levulan(R) to Stiefel was $110,000,
which has been deferred in its entirety at September 30, 2007 in accordance with
the Company's policy of deferring revenues during a product's launch phase and
recognizing revenues based on end-user demand.

13) SEGMENT REPORTING

     Beginning in the first quarter of 2006 with the acquisition of Sirius, the
Company has two reportable segments, Photodynamic Therapy (PDT) Drug and Device
Products and Non-Photodynamic Therapy (Non-PDT) Drug Products. Operating
segments are defined as components of the Company for which separate financial
information is available to manage resources and evaluate performance regularly
by the chief operating decision maker. The table below presents the revenues,
costs of revenues and gross margins attributable to these operating segments for
the periods presented. The Company does not allocate selling and marketing and
general and administrative expenses to its business unit segments, because these
activities are managed at a corporate level.


                                       18

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED              NINE MONTHS ENDED
                                           -----------------------------   -----------------------------
                                           SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                               2007             2006            2007           2006
                                           -------------   -------------   -------------   -------------
<S>                                        <C>             <C>             <C>             <C>
REVENUES
PDT Drug & Device Product Revenues           $3,488,759      $3,234,919     $12,107,246     $10,929,242
Non-PDT Drug Product Revenues                 2,295,435       2,827,801       7,215,986       6,503,108
                                             ----------      ----------     -----------     -----------
Total Revenues                                5,784,194       6,062,720      19,323,232      17,432,350
COSTS OF REVENUES
PDT Drug & Device Cost of Product
   Revenues and Royalties                     1,154,644       1,242,860       3,608,233       3,971,093
Non-PDT Drug Cost of Product
   Revenues and Royalties                       419,253       1,606,625       1,898,307       3,664,314
                                             ----------      ----------     -----------     -----------
Total Costs of Product Revenues and
   Royalties                                  1,573,897       2,849,485       5,506,540       7,635,407
GROSS MARGIN
PDT Drug and Device Product Gross Margin      2,334,115       1,992,059       8,499,015       6,958,149
Non-PDT Drug Product Gross Margin             1,876,182       1,221,176       5,317,677       2,838,794
                                             ----------      ----------     -----------     -----------
Total Gross Margin                           $4,210,297      $3,213,235     $13,816,692     $ 9,796,943
                                             ==========      ==========     ===========     ===========
</TABLE>

     During the three and nine-month periods ended September 30, 2007 and 2006,
the Company derived revenues from the following geographies (as a percentage of
product revenues):

<TABLE>
<CAPTION>
                THREE MONTHS ENDED   NINE MONTHS ENDED
                   SEPTEMBER 30         SEPTEMBER 30
                ------------------   -----------------
                  2007      2006       2007      2006
                -------   --------   -------   -------
<S>             <C>       <C>        <C>       <C>
United States      98%       96%        97%       94%
Canada              2%        4%         3%        6%
                  ---       ---        ---       ---
Total             100%      100%       100%      100%
                  ===       ===        ===       ===
</TABLE>

     Asset information by operating segment is not reported to or reviewed by
the chief operating decision maker and, therefore, we have not disclosed asset
information for each operating segment.

14) COMPREHENSIVE LOSS

     For the three and nine-month periods ended September 30, 2007 and 2006,
comprehensive loss consisted of the following:

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED           NINE MONTHS ENDED
                                          SEPTEMBER 30                SEPTEMBER 30
                                   -------------------------   --------------------------
                                       2007          2006          2007          2006
                                   -----------   -----------   -----------   ------------
<S>                                <C>           <C>           <C>           <C>
NET LOSS                           $(1,877,782)  $(3,786,639)  $(7,726,117)  $(13,080,901)
Change in net unrealized gains
   and losses on marketable
   securities available for sale        94,312       (56,756)      106,316        (27,313)
                                   -----------   -----------   -----------   ------------
COMPREHENSIVE LOSS                 $(1,783,470)  $(3,843,395)  $(7,619,801)  $(13,108,214)
                                   ===========   ===========   ===========   ============
</TABLE>

     Accumulated other comprehensive income consists of net unrealized gains and
losses on marketable securities available-for-sale, which is reported as part of
shareholders' equity in the Condensed Consolidated Balance Sheets.


                                       19
<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

15) DEFERRED COMPENSATION PLAN

     In October 2006, the Company adopted the DUSA Pharmaceuticals, Inc.
Non-Qualified Deferred Compensation Plan (the "Plan"), a non-qualified
supplemental retirement plan maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees and members of the Board of Directors of DUSA (the "Participants").
Participants may defer up to 80% of their compensation. A Participant will be
100% vested in all of the amounts he or she defers as well as in the earnings
attributable to a Participant's deferred account. A Participant may elect to
receive distributions from the deferred account at various times, either in a
lump sum or in up to ten annual installments. Included in other liabilities is
$105,000 at September 30, 2007, representing the Company's obligation under the
Plan. DUSA's obligation to pay the Participant an amount from his or her
deferred account is an unsecured promise and benefits shall be paid out of the
general assets of the Company. The Company has purchased corporate owned life
insurance to serve as the funding vehicle for the Plan. The cash surrender value
of the life insurance policy is recorded in deferred charges and other assets
and totaled $103,000 at September 30, 2007.

16) COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS:

RIVER'S EDGE

     On March 28, 2006, a lawsuit was filed by River's Edge Pharmaceuticals, LLC
against us alleging, among other things, that, prior to the merger with DUSA,
Sirius agreed to authorize River's Edge to market a generic version of
Nicomide(R), and that the United States patent covering Nicomide(R) issued to
Sirius in December 2005 is invalid. The declaratory judgment suit was filed in
the United States District Court for the Northern District of Georgia,
Gainesville Division but has been dismissed. Nicomide(R) is one of the key
products DUSA acquired from Sirius in its merger. River's Edge has also filed an
application with the U.S. Patent and Trademark Office requesting reexamination
of the Nicomide(R) patent. On April 20, 2006, the Company filed a patent
infringement suit in the United States District Court in Trenton, New Jersey
alleging that the River's Edge niacinamide product infringes U.S. Patent No.
6,979,468. The Company posted $750,000 with the court in an interest bearing
account. Although the court issued a preliminary injunction against sales of
River's Edge's product in May 2006, the injunction was lifted on March 7, 2007,
due, in part, to the court's determination that the reexamination process
presented sufficient changed circumstances to warrant the dissolution of the
injunction. On June 14, 2007, the court granted DUSA's request to amend its
complaint to assert claims against River's Edge for violations of the Lanham Act
and infringement of its copyright. Also, the court dismissed the various state
law claims that River's Edge had alleged against the Company. The court also
ordered that the parties participate in a non-binding mediation which took place
on August 9, 2007. Following the lifting of the preliminary injunction, River's
Edge reentered the market with its niacinamide-based product in competition with
Nicomide(R). Following the end of this quarter, DUSA and River's Edge settled
this litigation. See Note 17 Subsequent Events.

17) SUBSEQUENT EVENTS

SETTLEMENT OF RIVER'S EDGE LITIGATION INVOLVING NICOMIDE(R)

     On October 28, 2007, the Company entered into a Settlement and Mutual
Release Agreement (the "Settlement Agreement") to dismiss the lawsuit brought by
DUSA against River's Edge Pharmaceuticals, LLC ("River's Edge") asserting a
number of claims arising out of River's Edge's alleged infringement of U.S.
Patent No. 6,979,468 under which DUSA has marketed, distributed and sold
Nicomide(R). Under the terms of the Settlement Agreement, River's Edge
unconditionally acknowledged the validity and


                                       20

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

enforceability of the Nicomide(R) patent, made a lump-sum settlement payment to
DUSA in the amount of $425,000 for damages and will pay to DUSA a per unit
amount for every bottle of NIC 750 above a certain number of units that is
substituted for Nicomide(R) after September 30, 2007. River's Edge shall be
responsible for all returns of NIC 750 from the distribution chain and/or order
its destruction and will immediately cease the manufacture, distribution and
sale of NIC 750. River's Edge is obligated to withdraw and cease participating
in the re-examination of the Company's Nicomide(R) patent and has consented to
the return to the Company of the $750,000 bond that is currently being held by
the courts with all accrued interest.

     As part of the settlement, DUSA and River's Edge have also entered into a
license agreement, dated October 28, 2007 (the "License Agreement") whereby DUSA
granted a perpetual, exclusive license to River's Edge to manufacture and sell
four of products from the AVAR(R) line, including AVAR cleanser, AVAR gel, AVAR
E-emollient cream and AVAR E-green in exchange for a royalty on net sales of
these products, including a guaranteed minimum royalty of $300,000, payable in
equal annual installments of $100,000 for three years. DUSA provided its
on-hand inventory of these products to River's Edge for no cost. The Company
will participate in returns of split lots based on the two company's respective
pro-rata sales of these lots.

     DUSA acquired the AVAR products from Sirius Laboratories, Inc., the
Illinois corporation, as a result of the merger which closed on March 10, 2006.
In connection with the License Agreement, DUSA requested and received a waiver
to certain obligations to promote the AVAR products being licensed to River's
Edge from the Sirius shareholder representatives acting on behalf of all of the
former shareholders of Sirius Laboratories, Inc.

     As consideration for the waiver, the Company and the Sirius shareholder
representatives agreed to amend the merger agreement to extend the milestone
termination date provided in the merger agreement by eight (8) additional months
and agreed that for the balance of the 50 month period prior to the milestone
termination date (as amended), DUSA will credit the cumulative net sales
milestone amounts under the merger agreement with a monthly amount equal to the
average of the last 12-months of net sales by DUSA of the four products licensed
to River' Edge.

KOREA FDA APPROVAL

     In October 2007, Daewoong Pharmaceutical Co., Ltd. and its affiliate DNC
Daewoong Derma & Plastic Surgery Network Company received approval from the
Korea Food and Drug Administration for the use of Levulan(R) Kerastick(R) for
Photodynamic Therapy (PDT) for the treatment of actinic keratosis (AKs).
Pursuant to the terms of the agreement with Daewoong, the Company received a
payment of $1.0 million upon receipt of such approval.

LAUNCH OF LEVULAN KERASTICK IN LATIN AMERICA

     In October 2007 the Company achieved the first milestone under the Stiefel
Agreement upon the launch of the Levulan(R) Kerastick(R) in Mexico and
Argentina. Subsequent to quarter end, the Company received a payment of $375,000
from Stiefel related to the achievement of this milestone.

$11 MILLION PRIVATE PLACEMENT OF COMMON STOCK AND WARRANTS TO INSTITUTIONAL
INVESTORS

     On October 29, 2007, the Company entered into a securities purchase
agreement, common stock purchase warrants, and a registration rights agreement
(the "Definitive Agreements") with certain accredited investors for the private
placement of 4,581,043 shares of its common stock (the "Shares") at a purchase
price of $2.40 per share which resulted in gross proceeds to DUSA of
$11,000,000, and warrants to purchase an additional 1,145,259 shares of common
stock (the "Warrants"). The Warrants become


                                       21

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

exercisable on April 30, 2008, have a term of 5 years from the initial exercise
date, and have an exercise price of $2.85 per share. The Company has committed
to register the Shares and the shares underlying the Warrants with the
Securities and Exchange Commission on a Form S-3 registration statement. If the
registration statement does not become effective within a stated period of time,
then the investors are entitled to receive a cash payment of 1% of the aggregate
purchase price they paid for their respective Shares for each month that the
registration statement is delayed beyond the time periods stated in the
Definitive Agreements, up to a maximum of 12% of such aggregate purchase price.
The Company has paid the placement agent its fee, including expenses, of
$695,000 for its services in connection with the transaction.


                                       22

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

OVERVIEW

     DUSA is a vertically integrated dermatology company that is developing and
marketing Levulan(R) PDT and other products for common skin conditions. Our
currently marketed products include among others Levulan(R) Kerastick(R) 20%
Topical Solution with PDT, the BLU-U(R) brand light source, and the products
acquired in the March 10, 2006 merger with Sirius Laboratories, Inc., including,
Nicomide(R), Nicomide-T(R) and the newly launched product, ClindaReach(TM).

     Historically, we devoted most of our resources to advancing the development
and marketing of our Levulan(R) PDT/PD technology platform. Besides our marketed
products, our drug, Levulan(R) brand of aminolevulinic acid HCl, or ALA, in
combination with light, has been studied in a broad range of medical conditions.
When Levulan(R) is used and followed with exposure to light to treat a medical
condition, it is known as Levulan(R) PDT. When Levulan(R) is used and followed
with exposure to light to detect medical conditions, it is known as Levulan(R)
photodetection, or Levulan(R) PD. Our Kerastick(R) is the proprietary applicator
that delivers Levulan(R).

     The Levulan(R) Kerastick(R) 20% Topical Solution with PDT and the BLU-U(R)
brand light source were launched in the United States, or U.S., in September
2000 for the treatment of non-hyperkeratotic actinic keratoses, or AKs, of the
face or scalp under a former dermatology collaboration. AKs are precancerous
skin lesions caused by chronic sun exposure that can develop over time into a
form of skin cancer called squamous cell carcinoma. In addition, in September
2003 we received clearance from the United States Food and Drug Administration,
or FDA, to market the BLU-U(R) without Levulan(R) PDT for the treatment of
moderate inflammatory acne vulgaris and general dermatological conditions.

     Sirius Laboratories, Inc., or Sirius, a dermatology specialty
pharmaceuticals company, was founded in 2000 with a primary focus on the
treatment of acne vulgaris and acne rosacea. Nicomide(R), an oral prescription
vitamin supplement and Nicomide-T(R), a topical cosmetic product, two of the
important Sirius products, target the acne and acne rosacea markets. The merger
has allowed us to expand our product portfolio, capitalize on cross-selling and
marketing opportunities, increase our sales force size, as well as provide a
pipeline of potential new products, including ClindaReach(TM) which was launched
in March 2007.

     Acne is a common skin condition caused, in part, by the blockage and/or
inflammation of sebaceous (oil) glands. We are currently conducting a Phase II
study examining the use of Levulan(R) PDT for the treatment of moderate to
severe acne. We currently expect results from this study by the end of the third
quarter of 2008 depending upon how quickly we complete enrollment of patients.
We have received comments on our acne development program from the FDA
statistical reviewer assigned to our investigational new drug application, or
IND. In this letter, the reviewer stated concern about whether we will have
sufficient data to select an appropriate dosing regimen for Phase III trials. We
believe that we have the data to indicate that sufficient drug dose ranging has
been done; however, if the FDA does not accept our rationale, additional
clinical trials and/or formulation development work may be required for the acne
development program, whichmay extend the expected development time lines for
such program.

     Acne rosacea is a condition that primarily affects the skin of the face and
typically first appears between the ages of 30 and 60 as a transient flushing or
blushing on the nose, cheeks, chin or forehead, progressing in many patients to
a papulopustular form clinically similar to acne vulgaris (inflammatory acne).
Given its resemblance to inflammatory acne, and the general public's limited
knowledge of rosacea, the condition is frequently mistaken by patients as adult
acne. If untreated, rosacea has the tendency to worsen over time, although it
can also wax and wane.


                                       23

<PAGE>

     We are responsible for manufacturing of our Levulan(R) Kerastick(R) and for
the regulatory, sales, marketing, and customer service of our Levulan(R)
Kerastick(R), and other related product activities for all of our products. Our
current objectives include increasing the sales of our products in the United
States and Canada, launching Levulan(R) with our distributors in Brazil and
other Latin American countries and Asia, continuing our efforts of exploring
partnership opportunities for Levulan(R) PDT for dermatology in Europe,
continuing our Levulan(R) PDT clinical development program for the moderate to
severe acne indication and development of our pipeline product programs.

     To further these objectives, we entered into a marketing and distribution
agreement with Stiefel Laboratories, Inc. in January 2006 granting Stiefel an
exclusive right to distribute the Levulan(R) Kerastick(R) in Mexico, Central and
South America. We have been actively working with Stiefel to obtain acceptable
final pricing from the Brazilian regulatory authorities. During the quarter
ended September 30, 2007, in light of the unexpected delay in receiving
acceptable final pricing in Brazil, we amended certain terms of the original
Stiefel agreement to reflect our plans to launch in other Latin American
countries prior to Brazil. During the quarter ended September 30, 2007 our first
shipments were released to Argentina and Mexico. Pursuant to the Amendment,
Stiefel will make aggregate milestone payments to DUSA of up to $2,250,000,
rather than up to $3,000,000 under the Agreement as follows: (i) $375,000 upon
launch of the product in either Mexico or Argentina; (ii) $375,000 upon receipt
of acceptable pricing approval in Brazil; (iii) two installments of $375,000
each for cumulative end-user sales in Brazil totaling 150,000 units and 300,000
units, and (iv) two installments of $375,000 each for cumulative sales in
countries excluding Brazil totaling 150,000 units and 300,000 units. In
addition, the transfer price for the product was amended to set a fixed price
plus a royalty on net sales, rather than a revenue-sharing arrangement as under
the Agreement. DUSA believes that the amended transfer price reduces some of the
risk related to currency and market price fluctuations during the ten-year term
of the Agreement. Subsequent to September 30, 2007, we achieved the first
milestone under the Stiefel Agreement upon the launch of the Levulan(R)
Kerastick(R) in Mexico and Argentina and received a payment of $375,000. In
addition, on November 9, 2007, we became aware that the Brazilian authorities
had accepted the appeal of the initial pricing decision and that Stiefel would
receive the final outcome shortly.

     Similarly, we entered into a marketing and distribution agreement with
Daewoong Pharmaceutical Co., Ltd. and DNC Daewoong Derma & Plastic Surgery
Network Company, or collectively, Daewoong, granting Daewoong exclusive rights
to distribute the Levulan(R) Kerastick(R) in certain Asian countries. Subsequent
to September 30, 2007 the Korean Food and Drug Administration, or KFDA, approved
Levulan(R) Kerastick(R) for PDT for the treatment of actinic keratosis. Pursuant
to the terms of the agreement with Daewoong, we received a payment of $1.0
million upon receiving such approval. We expect to launch our product during the
first quarter of 2008.

     We are developing Levulan(R) PDT and PD under an exclusive worldwide
license of patents and technology from PARTEQ Research and Development
Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada.
We also own or license certain other patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R), BLU-U(R) Nicomide(R), Nicomide-T(R), Meted(R),
Psoriacap(R) and Psoriatec(R) are registered trademarks. Several of these
trademarks are also registered in Europe, Australia, Canada, and in other parts
of the world. Numerous other trademark applications are pending.

     As of September 30, 2007, we had an accumulated deficit of approximately
$128,613,000. We expect to continue to incur operating losses through 2007 and
until sales of our products increase. Achieving our goal of becoming a
profitable operating company is dependent upon greater acceptance of our therapy
by the medical and consumer constituencies in the United States, international
expansion of the Levulan(R) franchise, and our ability to develop and/or acquire
new profitable products.

     We operate in a highly regulated and competitive environment. Our
competitors include larger fully integrated pharmaceutical companies and
biotechnology companies. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, greater experience in drug development and in obtaining
regulatory approvals, and greater


                                       24

<PAGE>

manufacturing and sales and marketing capabilities than we do. On May 30, 2006,
we entered into a patent license agreement with PhotoCure ASA whereby in
settlement of patent disputes we granted a non-exclusive license to PhotoCure
under the patents we license from PARTEQ for esters of aminolevulinic acid, or
ALA. Furthermore, we granted a non-exclusive license to PhotoCure for its
existing formulations of its Hexvix(R) and Metvix(R) (known in the United States
as Metvixia(R)) products for any relevant patents that may issue to DUSA or that
we may license in the future. PhotoCure received FDA approval to market
Metvixia(R) for treatment of actinic keratosis in July 2004 and it would be
directly competitive with our Levulan(R) Kerastick(R) product should PhotoCure
with its marketing partner, Galderma S.A., decide to begin marketing this
product in the United States which could happen at any time. While we are
entitled to royalties from PhotoCure on its net sales of Metvixia in certain
territories, this product may adversely affect our ability to maintain or
increase our Levulan(R) market.

     We are dependent upon sole-source suppliers for a number of our raw
materials and products including Nicomide(R), Levulan(R) and the BLU-U(R). There
can be no assurance that these suppliers will be able to meet our future
requirements for such products or parts or that they will be available at
favorable terms. Any extended interruption in the supply of any such products or
parts or any significant price increase could have a material adverse effect on
our operating results in any given period.

     Marketing and sales activities since the launch of our sales force in 2003
have resulted in significant additional revenues as well as expenses. Levulan(R)
Kerastick(R) unit sales to end-users were 30,108 and 104,364 for the three and
nine-month periods ended September 30, 2007, respectively, including 1,890 and
7,098, respectively, sold in Canada. This represents an increase from 27,480 and
95,358 units sold in the three and nine-month periods ended September 30, 2006,
respectively, including 2,400 and 12,990, respectively, sold in Canada

     The net number of BLU-U(R) units placed in physicians' offices during the
nine months ended September 30, 2007 and 2006 was 178 and 211, respectively,
including 16 and 25 placed in Canada in 2007 and 2006, respectively. As of
September 30, 2007 and December 31, 2006 there were 1,815 and 1,637 units in
physicians' offices, respectively. During the quarter ended September 30, 2007
we implemented a "one-time" sales promotion in which we sold earlier generation
devices at a discounted price. During 2005 we began a BLU-U(R) marketing effort
to allow prospective customers to evaluate a BLU-U(R) for a short period of time
prior to making a purchase decision. BLU-U(R) commercial light sources placed in
physicians' offices pursuant to the Company's BLU-U(R) evaluation program are
classified as inventory in the accompanying consolidated balance sheets. We
amortize the cost of the evaluation units during the evaluation period to cost
of product revenues to approximate its net realizable value.

     Net revenues generated by the products acquired as part of our merger with
Sirius totaled $2,295,000 and $7,216,000 for the three and nine-month periods
ended September 30, 2007, respectively, compared to $2,828,000 and $6,503,000
for the three month period ended September 30, 2006 and the period March 10,
2006 (date of acquisition) through September 30, 2006, respectively. The
substantial majority of these revenues were from sales of Nicomide(R). We
believe that our Non-PDT Drug Products revenues were materially adversely
impacted during 2007 as a result of the dissolution of a preliminary injunction
by the United States District Court in Trenton, New Jersey on March 7, 2007,
which allowed River's Edge to reenter the market and sell its niacinamide-based
product, which was being substituted for Nicomide(R). See section entitled "Part
II. Other Information-Legal Proceedings-River's Edge."

     Certain of the products acquired in connection with the Sirius merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications
including Nicomide(R). FDA regulates such products under its marketed unapproved
drugs compliance policy guide entitled, "Marketed New Drugs without Approved
NDAs or ANDAs." Under this policy, the FDA recognizes that certain unapproved
products, based on the introduction date of their active ingredients and the
lack of safety concerns, have been marketed for many years and, at this time,
will not be the subject of any enforcement action. The FDA has recently taken a
more proactive role and is strongly encouraging manufacturers of such products
to submit applications to


                                       25

<PAGE>

obtain marketing approval and we have begun discussions with FDA to begin that
process. The FDA's enforcement discretion policy does not apply to drugs or
firms that may be in violation of regulatory requirements other than preapproval
submission requirements and the FDA may bring an action against a drug or a firm
when the FDA concludes that such other violations exist. The contract
manufacturer of Nicomide(R) has received notice that the FDA considers
prescription dietary supplements to be unapproved new drugs that are misbranded
and that cannot be legally marketed, and has received notice that the FDA
believes Nicomide(R) could not be marketed as a dietary supplement with its
current labeling. There can be no assurance that the FDA will continue this
policy or not take a contrary position with Nicomide(R). If the FDA were to take
further action, we may be required to make certain labeling changes and market
Nicomide(R) as an over-the-counter product or as a dietary supplement under
applicable legislation, or withdraw the product from the market, unless and
until we submit a marketing application and obtain FDA marketing approval. Any
such action by the FDA would have a material impact on our Non-PDT Drug Product
revenues. Label changes eliminating claims of certain medicinal benefits could
make it more difficult to market Nicomide(R) and could therefore, negatively
affect our revenues and profits.

     Shortly after the closing of the merger with Sirius, we became engaged in
patent litigation with River's Edge Pharmaceuticals LLC, or River's Edge, a
company that launched a niacinamide-based product. River's Edge also requested
that the United States Patent and Trademark Office, or USPTO, reexamine the
Nicomide(R) patent claiming that it is invalid. The USPTO accepted the
application for reexamination of the patent and the parties have submitted their
responses to the first office action. Although the court issued a preliminary
injunction against sales of River's Edge's product in May, 2006, the injunction
was lifted on March 7, 2007, due, in part, to the court's determination that the
reexamination process by the USPTO presented sufficient changed circumstances to
warrant the dissolution of the injunction. On October 28, 2007, we entered into
a settlement and mutual release agreement, or Settlement Agreement, and a
license agreement with River's Edge ending the litigation. See section entitled
"Part II. Other Information-Legal Proceedings-River's Edge." Nicomide(R) sales
were adversely impacted throughout the litigation process and had a material
negative impact on our revenues, results of operations and liquidity. We expect
that sales of Nicomide should begin to return to pre-litigation levels in the
coming months.

     We have recently been advised that the sole manufacturer of our product,
Psoriatec(R), may have produced batches that are not meeting stability
specifications. We are currently conducting testing of these batches and may
have to recall the product that is in the distribution channel which will impact
our sales of this product. We do not expect the costs of the potential recall,
if any, to be material. The license agreement for Psoriatec(R) expires January
31, 2008 and we do not intend to renew the license.

     We are continuing to explore opportunities to develop, market, and
distribute our Levulan(R) PDT platform in Europe and expect that our
distribution partners, Stiefel for Latin America and Daewoong for Asia will give
the product increased visibility in the market and thereby advance our
international strategy. We are also continuing to seek to acquire and/or license
additional dermatology products that complement our current product portfolio
that would provide our sales force with additional complementary products to
sell in the near term.

     We believe that issues related to reimbursement negatively impacted the
economic competitiveness of our therapy with other AK therapies and hindered its
adoption in the past. We have continued to support efforts to improve
reimbursement levels to physicians. Such efforts included working with the
Centers for Medicare and Medicaid Services, or CMS, and the American Academy of
Dermatology Association, or AADA, on matters related to PDT-related procedures
fee and the separate drug reimbursement. In addition, in many cases, physicians
can also bill for any applicable office visit reimbursements. We continue to
support ongoing efforts that might lead to further increases in reimbursement in
the future, and intend to continue supporting efforts to seek reimbursement for
our FDA-cleared use of the BLU-U(R) alone in the treatment of mild to moderate
inflammatory acne of the face. The currently proposed reimbursement amount for
our PDT-related procedure fee would increase by approximately 18% effective
January, 2008 if adopted as proposed.


                                       26

<PAGE>

     Most major private insurers have approved coverage for our AK therapy. We
believe that due to these efforts, plus potential future improvements, along
with our education and marketing programs, a more widespread adoption of our
therapy should occur over time.

     We recognize that we have to continue to demonstrate the clinical value of
our unique therapy, and the related product benefits as compared to other
well-established conventional therapies, in order for the medical community to
accept our products on a large scale. Since we cannot predict when product sales
may offset the costs associated with these efforts, we expect that we will
continue to generate operating losses through 2007. We are aware that physicians
have been using Levulan(R) with the BLU-U(R) using short incubation times, and
with light devices manufactured by other companies, and for uses other than our
FDA-approved use. While we are not permitted to market our products for
so-called 'off-label' uses, we believe that these activities are positively
affecting the sales of our products.

     We believe that some compounding pharmacies have exceeded the legal limits
for their activities, including manufacturing and/or selling quantities of ALA
in circumstances which may have induced purchasers to infringe our intellectual
property. We believe that these activities have negatively impacted our
Levulan(R) sales growth. Therefore during the last two years we have filed
lawsuits against compounding pharmacies, chemical companies, a distributor and
sales representative, as well as against a number of physicians. Many of these
lawsuits have already settled favorably to us. See section entitled "Part II.
Other Information-Legal Proceedings - Levulan(R) Lawsuits."

     After the close of the quarter, we entered into a securities purchase
agreement, common stock purchase warrants, and a registration rights agreement
with certain accredited investors for the private placement of 4,581,043 shares
of our common stock at a purchase price of $2.40 per share which resulted in
gross proceeds to us of $11,000,000. We also issued warrants to purchase an
additional 1,145,259 shares of common stock. The warrants become exercisable on
April 30, 2008, have a term of 5 years from the initial exercise date, and have
an exercise price of $2.85 per share. We have committed to register the shares
that were issued and the shares underlying the warrants with the Securities and
Exchange Commission on a Form S-3 registration statement. If the registration
statement does not become effective within a stated period of time, then the
investors are entitled to receive a cash payment of 1% of the aggregate purchase
price they paid for their respective shares for each month that the registration
statement is delayed beyond the time periods stated in the agreements, up to a
maximum of 12% of such aggregate purchase price. We paid the placement agent its
fee, including expenses, of $695,000 for its services in connection with the
transaction. We will use the proceeds from the sale of the securities to further
advance our Levulan(R) PDT clinical development programs and activities
associated with expanding our market presence in the U.S.

     As of September 30, 2007, we had a staff of 86 employees, including 4
part-time employees, as compared to 85 full-time employees, including 2
part-time employees at the end of 2006, who worked across all operating
functions at DUSA.

CRITICAL ACCOUNTING POLICIES

     Our accounting policies are disclosed in Note 2 to the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2006. Since all of these accounting policies do not require
management to make difficult, subjective or complex judgments or estimates, they
are not all considered critical accounting policies. We have discussed these
policies and the underlying estimates used in applying these accounting policies
with our Audit Committee. We consider the following policies and estimates to be
critical to our financial statements.

REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES

     We recognize revenues in accordance with Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104,
Revenue Recognition. This accounting policy for revenue recognition has a
substantial impact on our reported results and relies on


                                       27

<PAGE>

certain estimates that require difficult, subjective and complex judgments on
the part of management.

     PHOTODYNAMIC THERAPY (PDT) DRUG AND DEVICE PRODUCTS. Revenues on the
Kerastick(R) and BLU-U(R) product sales in the U.S. and Canada are recognized
when persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred, and collection is probable. Product sales
made through distributors, historically, have been recorded as deferred revenue
until the product was sold by the distributors to the end users because we did
not have sufficient history with our distributors to be able to reliably
estimate returns. Beginning in the first quarter of 2006, we began recognizing
revenue as product is sold to distributors because we believe we have sufficient
history to reliably estimate returns from distributors beginning January 1,
2006. This change in estimate was not material to our revenues or results of
operations. We offer programs that allow physicians access to our BLU-U(R)
device for a trial period. No revenue is recognized on these units until the
physician elects to purchase the equipment and all other revenue recognition
criteria are met.

     In January 2006, as amended in September 2007, we entered into an exclusive
marketing, distribution and supply agreement with Stiefel Laboratories, Inc. for
Levulan(R) PDT in Latin America (see Note 12). Under the agreement, Stiefel is
required to purchase Levulan(R) from us and make up front, milestone and royalty
payments. Stiefel may cancel the agreement if there is a breach of contract, if
either party files for bankruptcy, if its sales during any year are less than
its minimum purchase obligations, or, as to Brazil only, if acceptable pricing
approval, as defined in the agreement, is not obtained. No upfront or milestone
payments are refundable in any instance. Product shipments are subject to return
and refund only if the product does not comply with technical specifications. We
are obligated under the agreement to provide multiple deliverables; the primary
deliverables being license/product distribution rights and commercial product
supply. Under EITF No. 00-21 the deliverables under the agreement are treated as
a single unit of accounting, as we do not have evidence to support that the
consideration for the undelivered item, Levulan(R) units to be shipped, is at
fair value. Except during the launch phase when revenues are recognized based on
end-user demand, revenues from unit sales of Levulan(R) are recognized upon
product shipment. The agreement establishes a fixed supply price per unit, as
well as a royalty based on a percentage of the net sales price to end-users.
Royalty revenues are recorded each quarter based on Stiefel's reported net sales
for that quarter. Royalties are included in product revenues.

     The non-refundable up-front payments will be recognized into revenues on a
straight-line basis commencing upon the first product shipments in a country
(see Note 12) over the remaining initial contractual term of the agreement,
which is 10 years. The initial contractual term coincides with management's best
estimate of the product life cycle. Milestone payments based on cumulative units
shipped into a country will initially be deferred and then recognized on a
straight-line basis over the then remaining initial contractual term, with a
cumulative catch-up based on the number of years into the contract such
milestone is attained. As of September 30, 2007, in accordance with our policy
of deferring revenues on new product launches, we have deferred revenues of
$110,000 related to product shipments of Levulan(R) Kerastick(R) into Mexico and
Argentina that have not yet been sold through to the end user customers.

     On January 4, 2007, we entered into an exclusive marketing, distribution
and supply agreement with Daewoong Pharmaceutical Co., Ltd., or Daewoong, and
Daewoong's wholly owned subsidiary, DNC Daewoong Derma & Plastic Surgery Network
Company, and collectively with Daewoong referred to as D&D, covering current and
future uses of the Levulan(R) Kerastick(R) for PDT in dermatology. The agreement
grants D&D exclusive rights to distribute, promote and sell the Levulan(R)
Kerastick(R) in Korea, Taiwan, China, including without limitation Hong Kong,
India, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. We
will manufacture and supply the product to D&D from our facility in Wilmington,
MA. The agreement has an initial term of ten years (subject to earlier
termination and extension provisions). Under the terms of the agreement, D&D
will make up to $3.5 million in milestone payments to DUSA, $1.0 million of
which was paid upon contract execution during the first quarter of 2007 and
another $1.0 million was paid subsequent to September 30, 2007 upon achieving
regulatory approval in Korea. See Note 17 Subsequent Events. The remaining
milestones are based upon


                                       28

<PAGE>

achievement of pre-determined cumulative sales targets in the territory subject
to certain terms and conditions. In order to maintain its exclusive rights, D&D
is obligated to purchase a minimum number of units of the product and meet
regulatory timelines. We will also receive a minimum transfer price per unit
plus a percentage of D&D's end-user price above a certain level. The $1.0
million received during the first quarter of 2007 has been deferred in its
entirety and is included in other long term liabilities in the accompanying
condensed consolidated financial statements. We expect to launch our product in
Korea during the fourth quarter of 2007.

     NON-PDT DRUG PRODUCTS. We recognize revenue for sales of Non-PDT Drug
Products when substantially all the risks and rewards of ownership have
transferred to the customer, which generally occurs on the date of shipment to
wholesale customers, with the exceptions described below. Revenue is recognized
net of revenue reserves which consist of allowances for discounts, returns,
rebates chargebacks and fees paid to wholesalers under distribution service
agreements.

     In the case of sales made to wholesalers as a result of incentives and that
are in excess of a wholesaler's ordinary course of business inventory level,
substantially all the risks and rewards of ownership do not transfer upon
shipment and, accordingly, such sales are recorded as deferred revenue and the
related costs as deferred cost of revenue until the product is sold through to
the wholesaler's customers on a FIFO basis.

     We evaluate inventory levels at our wholesaler customers, which account for
the vast majority of our sales in the Non-PDT Drug Products segment, through an
analysis that considers, among other things, wholesaler purchases, wholesaler
shipments to retailers, available end-user prescription data obtained from third
parties and on-hand inventory data received directly from our three largest
wholesaler customers. We believe that our evaluation of wholesaler inventory
levels allows us to make reasonable estimates for our applicable revenue related
reserves. Additionally, our products are sold to wholesalers with a product
shelf life that allows sufficient time for our wholesaler customers to sell its
products in their inventory through to the retailers and, ultimately, to the
end-user consumer prior to product expiration.

     For new product launches where we do not have the ability to reliably
estimate returns, we recognize revenues based on end-user demand, which is
typically based on dispensed subscription data. When inventories have been
reduced to targeted stocking levels at wholesalers, and we have sufficient data
to determine product acceptance in the marketplace which allows us to estimate
product returns, we recognize revenue upon shipment to wholesalers, net of
discounts and allowances. As of September 30, 2007, the Company deferred
$303,000 in revenue related to the launch of ClindaReach(TM) that has not been
sold through to the end user customers.

     RETURNS AND ALLOWANCES - Our provision for returns and allowances consists
of our estimates of future sales returns, rebates and chargebacks.

     SALES RETURNS - We account for sales returns in accordance with Statements
of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right
of Return Exists, by establishing an accrual in an amount equal to our estimate
of sales recorded for which the related products are expected to be returned. We
determine the estimate of the sales return accrual primarily based on historical
experience regarding sales returns, but also by considering other factors that
could impact sales returns. These factors include levels of inventory in the
distribution channel, estimated shelf life, product recalls, product
discontinuances, price changes of competitive products, introductions of generic
products and introductions of competitive new products. It is our policy to
accept returns of Non-PDT Drug products when product is within six months of
expiration. We consider all of these factors and adjust the accrual periodically
to reflect our actual experience.

     CHARGEBACKS AND REBATES - Chargebacks typically occur when suppliers enter
into contractual pricing arrangements with end-user customers, including certain
federally mandated programs, who then purchase from wholesalers at prices below
what the supplier charges the wholesaler. Since we only offer


                                       29

<PAGE>

"preferred pricing" to end-user customers under federally mandated programs,
chargebacks have not been significant to us. Our rebate programs can generally
be categorized into the following two types: Medicaid rebates and consumer
rebates. Medicaid rebates are amounts owed based on legal requirements with
public sector benefit providers after the final dispensing of the product by a
pharmacy to a benefit plan participant. Consumer rebates are amounts owed as a
result of mail-in coupons that are distributed by health care providers to
consumers at the time a prescription is written. Since only a small percentage
of our prescriptions are reimbursed under Medicaid and the quantity of consumer
coupon redemptions have not been substantial, rebates have not been significant.

     We offer many of our customers a 2% prompt pay discount. We evaluate the
amount accrued for prompt pay discounts by analyzing the unpaid invoices in our
accounts receivable aging subject to a prompt pay discount. Prompt pay discounts
are known within 15 to 30 days of sale, and therefore we can reliably estimate
them based on actual and expected activity at each reporting date. We record
these discounts at the time of sale and they are accounted for as a reduction of
revenues.

WARRANTIES

     The Company routinely accrues for estimated future warranty costs on its
product sales at the time of sale. Our products are subject to rigorous
regulation and quality standards. Warranty costs are included in cost of product
revenues within the consolidated statements of operations.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

     We review long-lived assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of assets may not be
fully recoverable or that the useful lives of these assets are no longer
appropriate. Factors considered important which could trigger an impairment
review include significant changes relative to: (i) projected future operating
results; (ii) the use of the assets or the strategy for the overall business;
(iii) business collaborations; and (iv) industry, business, or economic trends
and developments. Each impairment test is based on a comparison of the
undiscounted cash flow to the recorded value of the asset. If it is determined
that the carrying value of long-lived or intangible assets may not be
recoverable, the asset is written down to its estimated fair value on a
discounted cash flow basis. At September 30, 2007 and December 31, 2006,
respectively, total property, plant and equipment had a net carrying value of
$2,278,000 and $2,567,000, including $1,517,000 and $1,639,000 at September 30,
2007 and December 31, 2006 associated with our manufacturing facility. As of
September 30, 2007 and December 31, 2006, respectively, we had intangible assets
totaling $66,000 and $102,000 recorded in deferred charges and other assets
relating to the unamortized balance of payments made in 2004 to a light source
supplier related to an amendment to our agreement and to a licensor related to
the reacquisition of our product rights in Canada. We reviewed the valuation of
our intangible assets and goodwill associated with Nicomide(R) for impairment as
a result of a decision by the U.S. federal district court in the River's Edge
litigation to dissolve a preliminary injunction, which had enjoined River's Edge
from manufacturing and selling its niacinamide-based product, which was being
substituted for Nicomide(R). As a result of this review, we recorded a write
down in 2006 of $15.7 million representing the then remaining net asset value of
the intangible assets.

     Goodwill is deemed to have an indefinite life and is not amortized, but is
reviewed at least annually for impairment utilizing the fair value methodology.
The Company has adopted December 1st as the date of the annual impairment test
for goodwill.

SHARE-BASED COMPENSATION

     We adopted SFAS 123R effective January 1, 2006, using the modified
prospective application method, and beginning with the first quarter of 2006, we
measure all employee share-based compensation awards using a fair value based
method and record share-based compensation expense in our financial statements
if the requisite service to earn the award is provided. The adoption of SFAS No.
123R did not affect our net cash flow, but it did have a material negative
impact on our results of operations. In


                                       30

<PAGE>

accordance with SFAS 123R, we recognize the expense attributable to stock awards
that are granted or vest in periods ending subsequent to December 31, 2005 in
the accompanying condensed consolidated statements of operations.

RESULTS OF OPERATIONS -THREE AND NINE MONTHS ENDING SEPTEMBER 30, 2007 VERSUS
SEPTEMBER 30, 2006

     REVENUES - Total revenues for the three and nine-month periods ended
September 30, 2007 were $5,784,000 and $19,323,000, respectively, as compared to
$6,619,000 and $11,370,000 in 2006, and were comprised of the following:

<TABLE>
<CAPTION>
                                            Three-months ended                      Nine-months ended
                                              September 30,                           September 30,
                                         -----------------------    Increase/   -------------------------    Increase/
                                            2007         2006      (Decrease)      2007           2006      (Decrease)
                                         ----------   ----------   ----------   -----------   -----------   ----------
<S>                                      <C>          <C>          <C>          <C>           <C>           <C>
PDT DRUG & DEVICE PRODUCT REVENUES

KERASTICK(R) PRODUCT REVENUES
United States                            $2,923,000   $2,490,000   $ 433,000    $10,108,000   $ 8,212,000   $1,896,000
Canada                                      143,000      176,000     (33,000)       536,000       939,000     (403,000)
                                         ----------   ----------   ---------    -----------   -----------   ----------
Subtotal Kerastick(R) product revenues    3,066,000    2,666,000     400,000     10,644,000     9,151,000    1,493,000
                                         ----------   ----------   ---------    -----------   -----------   ----------
BLU-U(R) PRODUCT REVENUES
United States                               423,000      516,000     (93,000)     1,369,000     1,633,000     (264,000)
Canada                                           --       53,000     (53,000)        94,000       145,000      (51,000)
                                         ----------   ----------   ---------    -----------   -----------   ----------
Subtotal BLU-U(R) product revenues          423,000      569,000    (146,000)     1,463,000     1,778,000     (315,000)
TOTAL PDT DRUG & DEVICE
PRODUCT REVENUES                          3,489,000    3,235,000     254,000     12,107,000    10,929,000    1,178,000

TOTAL NON-PDT DRUG PRODUCT REVENUES       2,295,000    2,828,000    (533,000)     7,216,000     6,503,000      713,000
                                         ----------   ----------   ---------    -----------   -----------   ----------
TOTAL PRODUCT REVENUES                   $5,784,000   $6,063,000   $(279,000)   $19,323,000   $17,432,000   $1,891,000
                                         ==========   ==========   =========    ===========   ===========   ==========
</TABLE>

For the three and nine-month periods ended September 30, 2007 total PDT Drug and
Device Product Revenues were $3,489,000 and $12,107,000, respectively. This
represents an increase of $254,000 or 8%, and $1,178,000 or 11%, over the
comparable 2006 totals of $3,235,000 and $10,929,000, respectively. The
incremental revenue on a year-to-date basis was driven by increased Kerastick(R)
revenues which were partially offset by decreased BLU-U(R) revenues.

     For the three and nine-month periods ended September 30, 2007, Kerastick(R)
revenues were $3,066,000 and $10,644,000, respectively, representing a $400,000
or 15%, and $1,493,000 or 16%, increase over the comparable 2006 totals of
$2,666,000 and $9,151,000, respectively. Kerastick(R) unit sales to end-users
were 30,108 and 104,364 for the three and nine-month periods ended September 30,
2007, respectively, including 1,890 and 7,098, respectively, sold in Canada.
This represents an increase from 27,480 and 95,358 Kerastick(R) units sold in
the three and nine-month periods ended September 30, 2006, respectively,
including 2,400 and 12,990, respectively, sold in Canada. Our average net
selling price for the Kerastick(R) increased to $101.89 for the first nine
months of 2007 from $95.96 for the first nine months of 2006. Our average net
selling price for the Kerastick(R) includes sales made directly to our end-user
customers in the United States, as well as sales made to our distributor in
Canada. The increase in 2007 Kerastick(R) revenue was driven mainly by increased
sales volumes and an increase in our average unit selling price.

     For the three and nine-month periods ended September 30, 2007, BLU-U(R)
revenues were $423,000 and $1,463,000, respectively, representing a $146,000, or
26%, and $315,000, or 18%, decrease over the comparable 2006 totals of $569,000
and $1,778,000, respectively. The decrease in year-to-date 2007 BLU-U(R) revenue
versus


                                       31

<PAGE>

the comparable 2006 period was driven by a decrease in our overall sales
volumes, partially offset by an increase in our average selling price to $7,596
for the nine-month period ended September 30, 2007 from $7,392 for the
nine-month period ended September 30, 2006. In the three and nine-month periods
ended September 30, 2007, there were 60 and 181 units sold, respectively, versus
77 and 235 units, respectively, in the comparable 2006 periods. The 2007 total
consists of 165 units sold in the United States and 16 sold in Canada by
Coherent-AMT. The 2006 total consists of 210 sold in the United States and 25
sold in Canada. During the fourth quarter of 2005, we introduced a BLU-U(R)
evaluation program, which, for a limited number of BLU-U(R) units, allows
customers to take delivery of a unit for a period of up to four months for
private practitioners and up to one year for hospital clinics, before a purchase
decision is required. At September 30, 2007, there were 31 units in the field
pursuant to this evaluation program. BLU-U(R) commercial light sources placed in
physicians' offices for an initial evaluation period are included in inventory
until all revenue recognition criteria are met. We amortize the cost of the
evaluation units during the evaluation period to cost of product revenues to
approximate their net realizable value.

     Non-PDT Drug Product Revenues reflect the revenues generated by the
products acquired as part of our March 10, 2006 acquisition of Sirius. Total
revenues for the three and nine-month periods ended September 30, 2007 were
$2,295,000 and $7,216,000, respectively, compared to $2,828,000 and $6,503,000,
respectively for the three month period ended September 30, 2006 and the period
March 10, 2006 through September 30, 2006. The substantial majority of the
Non-PDT product revenues were from sales of Nicomide(R). The products acquired
from Sirius all belong to the same therapeutic category, "non-photodynamic
therapy dermatological treatment of acne and rosacea." The decrease in Non-PDT
product revenues for the three-month period ended September 30, 2007 compared to
the prior year is due primarily to the dissolution of the preliminary injunction
on March 7, 2007, which had previously enjoined River's Edge from selling its
niacinamide-based product. On October 28, 2007 we entered into a settlement
agreement with River's Edge. See section entitled "Part II. Other
Information-Legal Proceedings-River's Edge. We expect that sales of Nicomide
should begin to return to pre-litigation levels in the coming months.

     The increase in our total revenues results from the Sirius acquisition, as
well as from the efforts of our sales force and related marketing and sales
activities. With respect to PDT segment United States sales, we increased both
our volumes through increased sales activities and our average selling prices
during 2007. However, we must increase sales significantly from these levels in
order for us to become profitable. We remain confident that PDT Drug Product
sales should continue to increase through increased consumption of our PDT
segment products by our existing customers, as well as through the addition of
new customers.

     Certain of the products acquired in connection with the Sirius merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications
including Nicomide(R). The FDA regulates such products under its marketed
unapproved drugs compliance policy guide entitled, "Marketed New Drugs without
Approved NDAs or ANDAs." Under this policy, the FDA recognizes that certain
unapproved products, based on the introduction date of their active ingredients
and the lack of safety concerns, have been marketed for many years and, at this
time, will not be the subject of any enforcement action. The FDA has recently
taken a more proactive role and is strongly encouraging manufacturers of such
products to submit applications to obtain marketing approval and we have begun
discussions with FDA to begin that process. The FDA's enforcement discretion
policy does not apply to drugs or firms that may be in violation of regulatory
requirements other than preapproval submission requirements and the FDA may
bring an action against a drug or a firm when the FDA concludes that such other
violations exist. The contract manufacturer of Nicomide(R) has received noticed
that the FDA considers prescription dietary supplements to be unapproved new
drugs that are misbranded and that cannot be legally marketed, and has received
notice that the FDA believes Nicomide(R) could not be marketed as a dietary
supplement with its current labeling. There can be no assurance that the FDA
will continue this policy or not take a contrary position with Nicomide(R). If
the FDA were to take further action,, we may be required to make certain
labeling changes and market Nicomide(R) as an over-the-counter products or as a
dietary supplements under applicable legislation, or withdraw the product from
the market, unless and until we submit a marketing application and obtain FDA
marketing approval. Any such action by the FDA could have a material impact on
our Non-PDT Drug Product revenue. Label changes eliminating claims of certain
medicinal benefits could make it more difficult to market Nicomide(R) and could
therefore, negatively affect our revenues and profits. Also see section entitled
"Risk Factors - Any Failure to Comply with Government Regulations in the United
States and Elsewhere Will Limit Our Ability


                                       32

<PAGE>

to Market Our Products."

     COST OF PRODUCT REVENUES - Cost of product revenues for the three and
nine-month periods ended September 30, 2007 were $1,574,000 and $5,507,000,
respectively, as compared to $2,849,000 and $7,635,000 in the comparable periods
in 2006. A summary of the components of cost of product revenues and royalties
is provided below:

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                            -----------------------    INCREASE/
                                                               2007         2006       (DECREASE)
                                                            ----------   ----------   -----------
<S>                                                         <C>          <C>          <C>
LEVULAN(R) KERASTICK(R)  COST OF PRODUCT REVENUES
Direct Levulan(R) Kerastick(R) Product Costs                $  433,000   $  380,000   $    53,000
Other Levulan(R) Kerastick(R) Product costs including
   internal costs assigned to support products                 231,000      224,000         7,000
Royalty and supply fees (1)                                    138,000      126,000        12,000
                                                            ----------   ----------   -----------
Subtotal Levulan(R) Kerastick(R) Cost of Product Revenues   $  802,000   $  730,000   $    72,000
                                                            ----------   ----------   -----------
BLU-U(R) COST OF PRODUCT REVENUES
Direct BLU-U(R) Product costs                               $  133,000   $  263,000   $  (130,000)
Other BLU-U(R) Product costs including internal
   costs assigned to support products; as well as costs
   incurred to ship, install and service the BLU-U(R) in
   physicians offices                                          219,000      250,000       (31,000)
                                                            ----------   ----------   -----------
Total Device cost of product revenues                       $  352,000   $  513,000   $  (161,000)
                                                            ----------   ----------   -----------
TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES            $1,154,000   $1,243,000   $   (89,000)
                                                            ----------   ----------   -----------
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES                 $  420,000   $1,606,000   $(1,186,000)
                                                            ----------   ----------   -----------
TOTAL COST OF PRODUCT REVENUES
                                                            $1,574,000   $2,849,000   $(1,275,000)
                                                            ==========   ==========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                               NINE MONTHS ENDED
                                                                SEPTEMBER 30,
                                                            -----------------------    INCREASE/
                                                               2007         2006       (DECREASE)
                                                            ----------   ----------   -----------
<S>                                                         <C>          <C>          <C>
LEVULAN(R) KERASTICK(R)  COST OF PRODUCT REVENUES
Direct Levulan(R) Kerastick(R) Product Costs                $1,508,000   $1,318,000   $   190,000
Other Levulan(R) Kerastick(R) Product costs including
   internal costs assigned to support products                 386,000      636,000      (250,000)
Royalty and supply fees (1)                                    486,000      461,000        25,000
                                                            ----------   ----------   -----------
Subtotal Levulan(R) Kerastick(R) Cost of Product Revenues   $2,380,000   $2,415,000   $   (35,000)
                                                            ----------   ----------   -----------
BLU-U(R) COST OF PRODUCT REVENUES
Direct BLU-U(R) Product costs                               $  555,000   $  802,000   $  (247,000)
Other BLU-U(R) Product costs including internal
   costs assigned to support products; as well as costs
   incurred to ship, install and service the BLU-U(R) in
   physicians offices                                          673,000      754,000       (81,000)
                                                            ----------   ----------   -----------
Total Device cost of product revenues                       $1,228,000   $1,556,000   $  (328,000)
                                                            ----------   ----------   -----------
TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES            $3,608,000   $3,971,000   $  (363,000)
                                                            ----------   ----------   -----------
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES                 $1,899,000   $3,664,000   $(1,765,000)
                                                            ----------   ----------   -----------
TOTAL COST OF PRODUCT REVENUES                              $5,507,000   $7,635,000   $(2,128,000)
                                                            ==========   ==========   ===========
</TABLE>


                                       33
<PAGE>

          1) Royalties and supply fees reflect amounts paid to our licensor,
          PARTEQ Research and Development Innovations, the licensing arm of
          Queen's University, Kingston, Ontario, and amortization of an upfront
          fee and ongoing royalties paid to Draxis Health, Inc., on sales of the
          Levulan(R) Kerastick(R) in Canada.

          2) Non-PDT Drug Cost of Product Revenues reflect the costs associated
          with the products acquired as part of our March 10, 2006 merger with
          Sirius.

     MARGINS - Total product margins for the three and nine month periods ended
September 30, 2007 were $4,210,000 and $13,817,000, respectively, as compared to
$3,213,000 and $9,796,000 for the comparable 2006 periods, as shown below:

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                       ----------------------------------------------
                                                                            INCREASE/
                                          2007              2006           (DECREASE)
                                       ----------        ----------        ----------
<S>                                    <C>          <C>  <C>          <C>  <C>
Levulan(R) Kerastick(R) Gross Margin   $2,263,000   74%  $1,935,000   73%   $328,000
BLU-U(R) Gross Margin                      71,000   17%      57,000   10%     14,000
                                       ----------        ----------         --------
Total PDT Drug & Device Gross Margin   $2,334,000   67%  $1,992,000   62%   $342,000
                                       ----------        ----------         --------
Total Non-PDT Drug Gross Margin         1,876,000   82%   1,222,000   43%   $654,000
                                       ----------        ----------         --------
TOTAL GROSS MARGIN                     $4,210,000   73%  $3,214,000   53%   $996,000
                                       ==========        ==========         ========
</TABLE>

<TABLE>
<CAPTION>
                                               NINE MONTHS ENDED SEPTEMBER 30,
                                       -----------------------------------------------
                                                                             INCREASE/
                                           2007              2006           (DECREASE)
                                       -----------        ----------        ----------
<S>                                    <C>           <C>  <C>          <C>  <C>
Levulan(R) Kerastick(R) Gross Margin   $ 8,264,000   78%  $6,736,000   74%  $1,528,000
BLU-U(R) Gross Margin                      235,000   16%     222,000   13%      13,000
                                       -----------        ----------        ----------
Total PDT Drug & Device Gross Margin   $ 8,499,000   70%  $6,958,000   64%  $1,541,000
                                       -----------        ----------        ----------
Total Non-PDT Drug Gross Margin          5,318,000   74%   2,839,000   44%  $2,479,000
                                       -----------        ----------        ----------
TOTAL GROSS MARGIN                     $13,817,000   72%  $9,797,000   56%  $4,020,000
                                       ===========        ==========        ==========
</TABLE>

     For the three and nine-month periods ended September 30, 2007 total PDT
Drug and Device Product Margins were 67% and 70%, respectively, versus 62% and
64% for the comparable 2006 periods. The incremental margin was driven by
positive margin gains on both the Levulan(R) Kerastick(R) and BLU-U(R).

     Levulan(R) Kerastick(R) gross margins for the three and nine month periods
ended September 30, 2007 were 74% and 78%, respectively, versus 73% and 74% for
the comparable 2006 periods. Similar to the increase in revenues, the increase
in margin is mainly attributable to an increase in our average unit selling
price. Our long-term goal is to achieve higher gross margins on Kerastick(R)
sales which will be significantly dependent on increased volume.

     BLU-U(R) margins for the three and nine month periods ended September 30,
2007 were 17% and 16%, respectively, versus 10% and 13% for the comparable 2006
periods. The increase in margin is a result of an increase in the average
selling price per unit; as well as, lower overall costs incurred to support the
product line. Our short-term strategy is to at a minimum breakeven on device
sales in an effort to drive Kerastick(R) sales volumes.

     Non-PDT Drug Product margins reflect the gross margin generated by the
products acquired as part of our acquisition of Sirius. Gross margins for the
three and nine-month periods ended September 30, 2007 were 82% and 74%,
respectively, compared to 43% and 44% for the three month period ended September
30, 2006 and the period March 10, 2006 (date of acquisition) through September
30, 2006, respectively. During the three and nine-month periods ended September
30, 2006, Non-PDT Drug Product margins were negatively impacted by the recording
of intangible asset amortization and the fair


                                       34

<PAGE>

value adjustment to inventory recorded as part of the Sirius acquisition, which
is partially offset by an increase in both the number and dollar amount of
rebate redemptions on sales of Nicomide(R) in 2007. We expect Non-PDT Drug
Product gross margins to be in the 70-80% range during the remainder of 2007.

     RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
three and nine month periods ended September 30, 2007 were $1,225,000 and
$4,328,000, respectively, as compared to $1,344,000 and $5,982,000,
respectively, in the comparable 2006 periods, which for the nine-month period
ended September 30, 2006 included $1,600,000 related to in-process research and
development acquired as part of the acquisition of Sirius. Increased spending on
our Phase IIb clinical trial on acne was offset by reduced spending in the areas
of photodamaged skin and Barrett's Esophagus.

     Research and development expenses reflect the costs of our Phase IIb
clinical trial for acne, which commenced in March 2007. We expect our research
and development costs to increase to an even greater extent at such time as we
may commence Phase III trials, or potentially a larger Phase II trial. The
current Phase II trial is being conducted at thirteen (13) sites and will accrue
approximately 260 patients, when fully enrolled. To date, approximately 150
patients have been accrued to this study. We had entered into a clinical trial
agreement in September 2004 with the National Cancer Institute, Division of
Cancer Prevention, or NCI DCP, to study the use of ALA to treat high grade
dysplasia within Barrett's Esophagus. However, the NCI DCP notified us that it
will not be pursuing this study at this time. Therefore, at this time, we will
not be incurring expenses for the laser devices, fiber optics and units of our
proprietary sheath device that we were obligated to provide under the agreement.
In March 2007, the U.S. Food and Drug Administration granted orphan drug status
for Levulan(R) PDT for treatment of esophageal dysplasia. In November 2004, we
also signed a clinical trial agreement with the NCI DCP for the treatment of
oral cavity dysplasia. DUSA and the NCI DCP are working together to prepare the
overall clinical development plan for Levulan(R) PDT in this indication,
starting with Phase I/II trials. A Phase I/II protocol has been finalized. The
NCI DCP used its resources to file its own investigational new drug application
with the FDA, and approval to initiate the study was received. Our costs related
to this study will be limited to providing Levulan(R), leasing lasers and the
necessary training for the investigators involved. All other costs of this study
are the responsibility of the NCI DCP. Although we expect the clinical trial on
oral cavity dysplasia to commence in 2007, the actual timing of the initiation
is within the total control of NCI so we cannot be certain of the initiation
date. We have options on any new intellectual property.

     We have entered into a series of agreements for our research projects and
clinical studies. As of September 30, 2007, future payments to be made pursuant
to these agreements, under certain terms and conditions, total approximately
$2,777,000 for the remainder of 2007.

     MARKETING AND SALES COSTS - Marketing and sales costs for the three and
nine-month periods ended September 30, 2007 were $2,887,000 and $9,728,000,
respectively, as compared to $3,246,000 and $9,114,000 for the comparable 2006
periods. These costs consist primarily of expenses such as salaries and benefits
for the marketing and sales staff, commissions, and related support expenses
such as travel, and telephone, totaling $2,010,000 and $6,275,000 for the three
and nine-month periods ended September 30, 2007, compared to $2,515,000 and
$6,514,000 in the comparable periods in 2006. The decrease in this category on
year-to-date basis is due to decreased commissions and bonuses, which is
partially offset by increased salaries resulting from higher average headcount
in 2007 in comparison to 2006, primarily as the result of the Sirius
acquisition. The remaining expenses consist of tradeshows, miscellaneous
marketing and outside consultants totaling $877,000 and $3,453,000 for the three
and nine month periods ended September 30, 2007, respectively, compared to
$731,000 and $2,600,000 for the comparable 2006 periods. We expect marketing and
sales costs to increase in 2007, compared with 2006, reflecting a full year of
the expanded sales force, as well as expenses associated with the launch of our
new product, ClindaReach(TM), but to decrease as a percentage of revenues.

     GENERAL AND ADMINISTRATIVE COSTS - General and administrative costs for the
three and nine-month periods ended September 30, 2007 were $2,111,000 and
$7,967,000, respectively, as compared to $2,603,000 and $8,427,000 for the
comparable 2006 periods. The decrease on a year-to-date basis is


                                       35

<PAGE>

mainly attributable to a decrease in accrued compensation during the third
quarter of 2007 reflecting a reduced estimate of our expected bonus payouts for
2007. General and administrative expenses are highly dependent on our legal and
other professional fees, which can vary significantly from period to period
particularly in light of our litigation strategy to protect our intellectual
property.

     OTHER INCOME, NET - Other income for the three and nine-month periods ended
September 30, 2007 decreased to $136,000 and $480,000, respectively, from
$194,000 and $646,000 during the comparable 2006 periods. This decrease is
primarily attributable to a decrease in our average investable cash balances
during 2007 as we used cash to purchase Sirius, as well as to support our
operating activities. We expect other income will increase in the future from
current levels due to the closing of a private placement subsequent to September
30, 2007. See Note 17 to the Notes to the Condensed Consolidated Financial
Statements.

     NET LOSSES - For the three and nine-month periods ended September 30, 2007,
we incurred net losses of $1,878,000, or $0.10 per share, and $7,726,000, or
$0.40 per share, respectively, as compared to net losses of $3,787,000, or $0.19
per share, and $13,081,000, or $0.77 per share, for the comparable periods in
2006. Net losses are expected to continue until end-user sales offset the cost
of our sales force and marketing initiatives, and the costs for other business
support functions.

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2007, we had approximately $11,224,000 of total liquid
assets, comprised of $1,005,000 of cash and cash equivalents and marketable
securities available-for-sale totaling $10,219,000. We estimate that existing
cash and cash equivalents and marketable securities, milestone payments
associated with our international marketing and distribution agreements, the
settlement payment from River's Edge, and the approximately $10.3 million of net
proceeds raised subsequent to September 30, 2007 in the private placement, will
be sufficient to meet our cash requirements for at least the next two years. Our
net cash used in operations for the nine-month period ended September 30, 2007
was $6,561,000, versus $8,324,000 used in the comparable 2006 period. The
year-over-year decrease is directly attributable to the growth in our PDT
products segment, as well as the addition of the Non-PDT Drug Products acquired
in the Sirius merger, and the receipt of a milestone payment in the amount of
$1.0 million from Daewoong, our distribution partner for certain Asian
countries. During the first quarter of 2007, we made a milestone payment of
$500,000 to the former shareholders of Sirius related to the launch of
ClindaReach(TM). We expect that a second payment of $500,000 could become due in
2008 when we expect the next product from the Sirius pipeline to be approved. An
abbreviated new drug application is currently pending.

     Since our inception, we have generated significant losses while we have
advanced our product candidates into preclinical and clinical trials,
development and commercialization. We have funded our operations primarily
through public offerings, private placements of equity securities and payments
received under our collaboration agreements. We expect to incur significant
additional research and development and other costs including costs related to
preclinical studies and clinical trials. Our costs, including research and
development costs for our product candidates and sales, marketing and promotion
expenses for any of our existing or future products to be marketed by us or our
collaborators may exceed revenues in the future, which may result in continued
losses from operations.

     As of September 30, 2007, working capital (total current assets minus total
current liabilities) was $12,655,000, as compared to $18,085,000 as of December
31, 2006. Total current assets decreased by $6.9 million during the nine-month
period ended September 30, 2007, due primarily to a decrease in our marketable
securities, which was used primarily to fund our loss from operations. Total
current liabilities decreased by $1.5 million during the same period due
primarily to a decrease in accrued compensation and accrued expenses, partially
offset by an increase in accounts payable.

     In consummating the merger with Sirius in 2006, we acquired all of the
outstanding common stock of Sirius in exchange for 2,396,245 shares of our
common stock and cash. At closing, we paid $8.0


                                       36

<PAGE>

million less certain expenses, in cash, and 1,973,353 shares of our common
stock, no par value per share to the shareholders of Sirius and issued an
additional 422,892 shares to an escrow agent to be held for up to two years
subject to certain indemnification provisions of the merger agreement. We agreed
to pay additional consideration in future periods, based upon the attainment of
defined operating objectives, including new product approvals or launches and
the achievement of pre-determined total cumulative sales milestones for the
Sirius products. The pre-determined cumulative sales milestones for the Sirius
products and the related milestone payments are as follows:

<TABLE>
<CAPTION>
CUMULATIVE SALES
   MILESTONE:      PAYMENT EARNED:
  (in millions)     (in millions)
----------------   ---------------
<S>                <C>
$25.0                    $1.5
 35.0                     1.0
 45.0                     1.0
                         ----
   Total:                $3.5
                         ====
</TABLE>

     During the first quarter of 2007, we paid $500,000 to the former
shareholders of Sirius related to the March 2007 launch of ClindaReach(TM). This
payment has increased goodwill in the accompanying condensed consolidated
balance sheet. The maximum remaining potential future consideration pursuant to
such arrangements, to be resolved over the period ending 50 months from the date
of close, is $4.5 million. If attained, the product launch portion of the
contingent consideration is payable in cash and the cumulative sales milestone
portion is payable in either common stock or cash, at our sole discretion. We
expect that any such payments will result in increases in goodwill at time of
payment.

     We are actively seeking to further expand or enhance our business by using
our resources to acquire by license, purchase or other arrangements, additional
businesses, new technologies, or products in the field of dermatology. For 2007,
we are focusing primarily on increasing the sales of the Levulan(R) Kerastick(R)
and the BLU- U(R), as well as the Non-PDT Drug Products, advancing our Phase II
study for use of Levulan(R) PDT in acne, and continuing to pursue our product
development pipeline.

     After the close of the quarter, we entered into a securities purchase
agreement, common stock purchase warrants, and a registration rights agreement
with certain accredited investors for the private placement of 4,581,043 shares
of its common stock at a purchase price of $2.40 per share which resulted in
gross proceeds to DUSA of $11,000,000. We also issued warrants to purchase an
additional 1,145,259 shares of common stock. The warrants become exercisable on
April 30, 2008, have a term of 5 years from the initial exercise date, and have
an exercise price of $2.85 per share. We have committed to register the shares
that were issued and the shares underlying the warrants with the Securities and
Exchange Commission on a Form S-3 registration statement. If the registration
statement does not become effective within a stated period of time, then the
investors are entitled to receive a cash payment of 1% of the aggregate purchase
price they paid for their respective shares for each month that the registration
statement is delayed beyond the time periods stated in the agreements, up to a
maximum of 12% of such aggregate purchase price. We paid the placement agent its
fee, including expenses, of $695,000 for its services in connection with the
transaction. We will use the proceeds from the sale of the securities to further
advance our Levulan(R) PDT clinical development programs and activities
associated with expanding our market presence in the U.S.

     In October 2007, Daewoong Pharmaceutical Co., Ltd. and its affiliate DNC
Daewoong Derma & Plastic Surgery Network Company received approval from the
Korea Food and Drug Administration for the use of Levulan(R) Kerastick(R) for
PDT for the treatment of actinic keratosis. Pursuant to the terms of the
agreement with Daewoong, we received a payment of $1.0 million upon receipt of
the approval.

     In October 2007 we achieved the first milestone under the amended Stiefel
Agreement that being the launch of the Levulan(R) Kerastick(R) in Mexico and
Argentina. Subsequent to the end of the quarter, we received a payment of
$375,000 from Stiefel related to the achievement of this milestone.


                                       37

<PAGE>

     On October 28, 2007, we entered into a settlement agreement with River's
Edge dismissing the lawsuit we brought against River's Edge. Under the terms of
the agreement, River's Edge made a lump-sum settlement payment to DUSA in the
amount of $425,000 for damages, among other consideration. River's Edge has also
consented to the return to the Company of the $750,000 bond with all accrued
interest that is currently being held by the court.

     DUSA has no off-balance sheet financing arrangements.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

ALTANA, INC.

     In September 2005, Sirius entered into a development and product license
agreement with Altana, Inc. relating to a reformulated dermatology product. The
agreement was assigned to us by virtue of the Sirius merger. According to the
agreement, we will pay for all development costs. Should development efforts be
successful, Altana will manufacture the product for us and we will be obligated
to pay royalties, including certain minimum royalties on net sales of the
product. The agreement expires six years after the first commercial sale of the
product.

ACTAVIS TOTOWA, LLC

     Under an agreement dated May 18, 2001, and amended on February 8, 2006,
Sirius entered into an arrangement for the supply of Nicomide(R) with Amide
Pharmaceuticals, Inc., now known as Actavis Totowa, LLC. The agreement was
assigned to us as part of the Sirius merger. Actavis Totowa supplies all of our
requirements; however, we have the right to use a second source for a
significant portion of our needs if we choose to do so. The agreement expires on
February 8, 2009. Actavis Totowa has received several warning letters from the
FDA regarding certain regulatory observations. To our knowledge, the primary
cGMP observations noted in the warning letters were not related to Nicomide(R).
However, with respect to Nicomide(R) and certain other products manufactured by
Actavis Totowa that may be covered under the FDA's compliance policy guide
entitled, "Marketed New Drugs without Approved NDAs or ANDAs", the FDA requested
that the manufacturer provide a copy of the labeling and information providing
its position regarding the regulatory status of these products and has notified
Actavis Totowa that the FDA believes Nicomide(R) is not properly labeled as a
vitamin supplement. The FDA may take further action against Actavis Totowa, or
DUSA, and we are evaluating our options in order to maintain supply of
Nicomide(R).

L. PERRIGO COMPANY

     On October 25, 2005, Sirius entered into a supply agreement with L. Perrigo
Company, or Perrigo, for the exclusive manufacture and supply of a proprietary
device/drug kit designed by Sirius pursuant to an approved ANDA owned by
Perrigo. The agreement was assigned to us as part of the Sirius merger. We have
now launched this product, called ClindaReach(TM). Perrigo is entitled to
royalties on net sales of ClindaReach(TM), including certain minimum annual
royalties, which commenced May 1, 2006, in the amount of $250,000. The initial
term of the agreement expires in July, 2011 and may be renewed based on certain
minimum purchase levels and other terms and conditions.

WINSTON LABORATORIES, INC.

     On or about January 30, 2006 Winston Laboratories, Inc., or Winston, and
Sirius entered into a license agreement relating to a Sirius product,
Psoriatec(R) (known by Winston as Micanol) revising a former agreement. Winston
Laboratories, Inc. is controlled by Dr. Joel Bernstein, a principal shareholder
of the former Sirius. This agreement was assigned to us as part of the Sirius
merger. The 2006 agreement grants an exclusive license, with limitation on
rights to sublicense, to all property rights, including all intellectual
property and improvements, owned or controlled by Winston to manufacture, sell
and distribute products containing anthralin, in the United States. We pay
royalties on net sales of the product,


                                       38

<PAGE>

and certain minimum royalties are due each year to maintain the license. We have
an option to purchase the product from Winston at certain times prior to the
expiration of the agreement on January 31, 2008, which we have decided not to
exercise. Minimum royalties to Winston are $300,000 per year ending January 31,
2008. We do not intend to renew this agreement.

PARTEQ AGREEMENT

     We license certain patents underlying its Levulan(R) PDT/PD systems under a
license agreement with PARTEQ Research and Development Innovations, or PARTEQ,
the licensing arm of Queen's University, Kingston, Ontario. Under the agreement,
we have been granted an exclusive worldwide license, with a right to sublicense,
under PARTEQ patent rights, to make, have made, use and sell certain products,
including ALA. The agreement covers certain use patent rights. When we are
selling our products directly, we agreed to pay to PARTEQ royalties of 6% and 4%
on 66% of the net selling price in countries where patent rights do and do not
exist, respectively. In cases where we have a sublicensee, we will pay 6% and 4%
when patent rights do and do not exist, respectively, on its net selling price
less the cost of goods for products sold to the sublicensee, and 6% of payments
we receive on sales of products by the sublicensee.

     Annual minimum royalties to PARTEQ must total at least CDN $100,000 (U.S.
$101,000) as of September 30, 2007.

     We are also obligated to pay to PARTEQ 5% of any lump sum sublicense fees
we receive with respect to Levulan(R), such as milestone payments, excluding
amounts designated by a sublicensee for future research and development efforts.

LICENSE AND SUPPLY AGREEMENTS

     On August 7, 2007, we terminated our former License and Development
Agreement with photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German
pharmaceutical company, and a supply agreement with medac. These agreements
provided for the licensing to DUSA of photonamic's proprietary technology
related to ALA for systemic dosing in the field of brain cancer. Since we did
not believe that the results from medac's European Phase III clinical study
would be acceptable to the FDA and we do not intend to conduct additional
clinical trials in the brain cancer field, we mutually terminated these
agreements, without penalty, relinquishing our rights to the technology for
fluorescent-guided resection of brain cancer. However, certain provisions of
these agreements survive the termination. We entered a new License and Supply
Agreement as of August 7, 2007 among photonamic, medac and us confirming our
rights to use certain pre-clinical data and licensed technology on a
non-exclusive basis outside of this field, in the U.S., and other territories
and providing for a supply of medac's oral and intravenous formulation of ALA on
terms to be mutually agreed upon. The term of the agreement is five (5) years,
subject to rights to earlier termination and automatic renewals. No additional
royalties or payments for the license is due to photonamic.

AMENDED AND RESTATED PURCHASE AND SUPPLY AGREEMENT

     On June 21, 2004, we signed an Amended and Restated Purchase and Supply
Agreement with National Biological Corporation ("NBC"), the manufacturer of our
BLU-U(R) light source. This agreement provides for the elimination of certain
exclusivity clauses, permits us to order on a purchase order basis without
minimums, and includes other modifications of the original agreement providing
both parties greater flexibility related to the development and manufacture of
light sources and the associated technology within the field of PDT. We paid
$110,000 to NBC upon execution of the agreement which is being amortized over
the remaining term of the agreement, expiring November 5, 2008.

DRAXIS TERMINATION AND TRANSFER AGREEMENT

     On February 24, 2004, we reacquired the rights to the aminolevulinic acid
(Levulan(R)) technology for Canada held by Draxis Health Inc. ("Draxis"). These
rights were initially assigned to


                                       39

<PAGE>

Draxis in 1991. We mutually agreed to terminate the assignment and we agreed to
pay to Draxis an upfront fee of $150,000 CDN ($114,000 USD at February 24, 2004)
and a 10% royalty on sales of the Levulan(R) Kerastick(R) in Canada over a five
year term commencing in June 2004 based on the first Kerastick(R) sale in Canada
by Coherent, our Canadian marketing and distribution partner.

LEASE AGREEMENTS

     We have entered into lease commitments for office space in Wilmington,
Massachusetts, Valhalla, New York, and Toronto, Ontario. These leases generally
have five or ten year terms. The minimum lease payments disclosed below include
the non-cancelable terms of the leases.

RESEARCH AGREEMENTS

     We have entered into various agreements for research projects and clinical
studies. As of September 30, 2007, future payments to be made pursuant to these
agreements, under certain terms and conditions, totaled approximately
$2,777,000. Included in this future payment is a master services agreement,
effective June 15, 2001, with Therapeutics, Inc. for an initial term of two
years, with annual renewal periods thereafter, to engage Therapeutics to manage
the clinical development of our products in the field of dermatology. The
agreement was renewed on June 15, 2007 for a one year period. Therapeutics is
entitled to receive a bonus of between $50,000 and $200,000, in cash or stock at
our discretion, upon each anniversary of the effective date. Therapeutics has
the opportunity for additional bonuses for each product indication ranging from
$250,000 to $1,250,000 depending on the regulatory phase of development of
products during Therapeutics' management.

     Our contractual obligations and other commercial commitments to make future
payments under contracts, including lease agreements, research and development
contracts, manufacturing contracts, or other related agreements, are as follows
at September 30, 2007:

<TABLE>
<CAPTION>
                                    Total     1 Yr or less    2-3 Years    4-5 Years    After 5
                                 ----------   ------------   ----------   ----------   --------
<S>                              <C>          <C>            <C>          <C>          <C>
Operating lease obligations      $2,223,000    $  445,000    $  923,000   $  788,000   $ 67,000
Purchase obligations (1,2)        3,912,000     3,053,000       859,000           --         --
Minimum royalty obligations(3)    1,512,000       450,000       700,000      263,000     99,000
                                 ----------    ----------    ----------   ----------   --------
Total obligations                $7,647,000    $3,948,000    $2,482,000   $1,051,000   $166,000
                                 ==========    ==========    ==========   ==========   ========
</TABLE>

1)   Research and development projects include various commitments including
     obligations for our Phase IIb clinical study for moderate to severe acne.

2)   In addition to the obligations disclosed above, we have contracted with
     Therapeutics, Inc., a clinical research organization, to manage the
     clinical development of our products in the field of dermatology. This
     organization has the opportunity for bonuses for each product indication
     ranging from $250,000 to $1,250,000 depending on the regulatory phase of
     development of products under Therapeutics' management.

3)   Minimum royalty obligations relate to our agreements with PARTEQ, Winston
     and Perrigo described above.

INFLATION

     Although inflation rates have been comparatively low in recent years,
inflation is expected to apply upward pressure on our operating costs. We have
included an inflation factor in our cost estimates. However, we expect the
overall net effect of inflation on our operations to be minimal.


                                       40

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. Our investment policy specifies credit quality
standards for our investments and limits the amount of credit exposure to any
single issue, issuer or type of investment. Our investments consist of United
States government securities and high grade corporate bonds. All investments are
carried at market value, which approximates cost.

     As of September 30, 2007, the weighted average rate of return on our
investments was 3.46%. If market interest rates were to increase immediately and
uniformly by 100 basis points from levels as of September 30, 2007, the fair
market value of the portfolio would decline by $153,000. Declines in interest
rates could, over time, reduce our interest income.

ITEM 4. CONTROLS AND PROCEDURES

     We carried out an evaluation, under the direction of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e)). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2007.

     There have been no changes in our internal control over financial reporting
that occurred during the quarter ended September 30, 2007 that have materially
affected, or are reasonably likely to materially affect, DUSA's internal control
over financial reporting.

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q, including the Management's Discussion
and Analysis, and certain written and oral statements incorporated herein by
reference of DUSA Pharmaceuticals, Inc. (referred to as "DUSA," "we," and "us")
contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995 and Section
27A of the Securities Act of 1933, as amended. Such forward-looking statements
are based on current expectations, estimates, beliefs and projections about
future events, including, but not limited to beliefs concerning the impact of
compounding pharmacies, beliefs regarding estimates, our expectations regarding
our merger with Sirius Laboratories, Inc. and matters relating thereto, our
expectations concerning the introduction of niacinamide-based product, which is
being substituted for Nicomide(R) and such products' impact on sales of
Nicomide(R), beliefs concerning the focus on ClindaReach(TM) and its impact on
other products and revenues, management's beliefs regarding the unique nature of
Levulan(R) and its use and potential use, expectations regarding the timing of
results of clinical trials, future development of Levulan(R) and our other
products and other potential indications, intention to pursue licensing,
marketing, co-promotion, collaboration or acquisition opportunities, status of
clinical programs for all other indications and beliefs regarding potential
efficacy and marketing, our intention to develop combination drug and light
device systems, our expectations regarding new proprietary endoscopic light
delivery systems and the potential use of other light devices, our beliefs
regarding the safety, simplicity, reliability and cost-effectiveness of certain
light sources, our expectations regarding other product launches in Brazil,
Mexico, Korea and other territories, hope that our products will be an AK
therapy of choice and barriers to achieving that status, our beliefs regarding
growth, revenues and market opportunities from approved and potential products,
our plans to eliminate certain expenses for the coming year and reallocate
others, beliefs regarding the clinical benefit of Levulan(R) PDT for acne and
other indications, beliefs regarding the suitability of clinical data,
expectations regarding the confidentiality of our proprietary information,
intentions to seek additional U.S. and foreign regulatory approvals, and to
market and increase sales outside the U.S., beliefs regarding regulatory
classifications, filings, timelines, off-label use and environmental compliance,
beliefs concerning patent disputes and litigation, the impact of a third-party's


                                       41

<PAGE>

regulatory compliance and fulfillment of contractual obligations, and our
anticipation that third parties will launch products upon receipt of regulatory
approval, expectations of increases in cost of product sales, expectations
regarding margins on Kerastick(R) and other products, expected use of cash
resources, requirements of cash resources for our future liquidity, beliefs
regarding investments and economic conditions, beliefs regarding accounting
policies and practices, expectations regarding outstanding options and warrants
and our dividend policy, anticipation of increases or decreases in personnel,
effect of reimbursement policies on revenues and acceptance of our therapies,
expectations for future strategic opportunities and research and development
programs and expenses, expectations for continuing operating losses and
competition including from Metvixia, expectations regarding the adequacy and
availability of insurance, expectations regarding general and administrative
costs, expectations regarding increased sales and marketing costs and research
and development costs, levels of interest income and our capital resource needs,
intention to raise additional funds to meet capital requirements and the
potential dilution and impact on our business, other income will increase in the
future from current levels due to the closing of a private placement, potential
for additional inspection and testing of our manufacturing facilities or
additional FDA actions, beliefs regarding the adequacy of our inventory of
Kerastick(R) and BLU-U(R) units, our manufacturing capabilities and the impact
of inventories on revenues, belief regarding interest rate risks to our
investments and effects of inflation and new and existing accounting standards
and policies, beliefs regarding the impact of any current or future legal
proceedings, dependence on key personnel, and beliefs concerning product
liability insurance. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," or variations of such words and similar
expressions, are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict particularly
in the highly regulated pharmaceutical industry in which we operate. Therefore,
actual results may differ materially from those expressed or forecasted in any
such forward-looking statements. Such risks and uncertainties include changing
market, regulatory and marketplace conditions, actual clinical results of our
trials, our ability to sell, market and develop our products and product
candidates, the potential need to hire additional personnel or retain existing
personnel, the impact of competitive products and pricing, the timely
development, FDA approval, and market acceptance of our products, the
maintenance of our patent portfolio, changes in our long and short term goals,
financial and operational risks associated with our merger with Sirius
Laboratories, Inc., the litigation process, the ability to obtain competitive
levels of reimbursement by third-party payors, and other risks noted herein and
in our other SEC filings from time to time and those set forth herein under
"Risk Factors" on pages 44 through 57, as well as those noted in the documents
incorporated herein by reference. Unless required by law, we undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. However, readers should
carefully review the statements set forth in other reports or documents we file
from time to time with the Securities and Exchange Commission, particularly our
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.


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                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

LEVULAN(R) LAWSUITS

     In December 2004, we began a litigation strategy to protect our
intellectual property. We began to file lawsuits against physicians to prevent
their unlicensed use of versions of our Levulan(R) brand of ALA produced by
third-parties for use in our patented PDT treatment for actinic keratosis, basal
cell carcinoma, or acne. We have also sued compounding pharmacies which we
believed were inducing physicians to infringe our patents on the photodynamic
treatment of acne or actinic keratosis. The lawsuits against physicians and
compounding pharmacies have settled favorably to us and we have the right to
review their books and records to verify ongoing compliance. We expect to
maintain this strategy as long as we believe physicians and compounding
pharmacies are infringing our intellectual property.

     We are in litigation with a chemical supplier in United States District
Court for the District of District of Utah, alleging that the defendant induced
physicians to infringe patents licensed to us, among other things. In its answer
and counterclaim, as expected, the defendant alleges that our patents are
invalid. This case is still at an early stage.

     While we believe that certain actions of compounding pharmacies and others
may have gone beyond the activities which are permitted under the Food, Drug and
Cosmetic Act and we have advised the FDA and local health authorities of our
concerns, we cannot be certain that our lawsuits will be successful in curbing
the practices of these companies or that regulatory authorities will intervene
to stop their activities. In addition, there may be other compounding pharmacies
which are following FDA guidelines, or others conducting illegal activities of
which we are not aware, which may be negatively impacting our sales revenues.

RIVER'S EDGE

     On March 28, 2006, a lawsuit was filed in the United States District Court
for the Northern District of Georgia, Gainesville Division by River's Edge
Pharmaceuticals, LLC, or River's Edge, against us alleging, among other things,
that, prior to our merger with the former Sirius Laboratories, Inc., Sirius
agreed to authorize River's Edge to market a generic version of Nicomide(R), and
that the United States patent covering Nicomide(R) issued to Sirius in December,
2005 is invalid. Nicomide(R) is one of the key products DUSA acquired from
Sirius in our merger. On June 19, 2006, the Georgia court dismissed the River's
Edge complaint.

     River's Edge also filed an application with the United States Patent and
Trademark Office, or USPTO, requesting an inter partes reexamination of the
Nicomide(R) patent. The USPTO has accepted the application and the parties have
submitted their responses to the USPTO's first office action.

     On April 20, 2006, we filed a patent infringement suit in the United States
District Court in Trenton, New Jersey alleging that River's Edge's niacinamide
product infringes our United States patent 6,979,468. We posted $750,000 with
the court that is being held in an interest bearing account. The court also
ordered that the parties participate in a non-binding mediation which occurred
on August 9, 2007.

     On October 28, 2007, we entered into a settlement and mutual release
agreement, or settlement agreement, to dismiss the lawsuit brought by DUSA
against River's Edge, asserting a number of claims arising out of River's Edge's
alleged infringement of U.S. Patent No. 6,979,468 under which DUSA has marketed,
distributed and sold Nicomide(R). Under the terms of the settlement agreement,
River's Edge unconditionally acknowledges the validity and enforceability of the
Nicomide(R) patent. River's Edge has made a lump-sum settlement payment to DUSA
in the amount of $425,000 for damages and will pay to DUSA a per unit amount for
every bottle of NIC 750 above a certain number of units that is substituted


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<PAGE>

for Nicomide(R) after September 30, 2007. River's Edge shall be responsible for
all returns of NIC 750 from the distribution chain and/or order its destruction
and will immediately cease the manufacture, distribution and sale of NIC 750.
River's Edge is obligated to withdraw and cease participating in the
re-examination of the Nicomide(R) patent and has consented to the return to us
of the $750,000 bond that is currently being held by the court with all accrued
interest.

     As part of the settlement, DUSA and River's Edge have also entered into a
license agreement, dated October 28, 2007 (the "License Agreement") whereby DUSA
granted a perpetual, exclusive license to River's Edge to manufacture and sell
four of products from the AVAR(R) line, including AVAR cleanser, AVAR gel, AVAR
E-emollient cream and AVAR E-green in exchange for a royalty on net sales of
these products, including a guaranteed minimum royalty of $300,000, payable in
equal annual installments of $100,000 for three years. DUSA provided its
on-hand inventory of these products to River's Edge for no cost. We will
participate in returns of split lots based on the two company's respective
pro-rata sales of these lots.

ITEM 1A. RISK FACTORS.

     A description of the risk factors associated with our business is set forth
below. This description includes any material changes to and supersedes the
description of the risk factors associated with our business previously
disclosed in Item 1A. of our 2006 Annual Report on Form 10-K for the year ended
December 31, 2006 and Item 1 of our Form S-8 filed in March 2007.

     You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this Quarterly Report on Form 10-Q. The following
are among the risks we face related to our business, assets and operations. They
are not the only ones we face. Any of these risks could materially and adversely
affect our business, results of operations and financial condition, which in
turn could materially and adversely affect the value of our securities.

     This section of the Quarterly Report on Form 10-Q contains forward-looking
statements of our plans, objectives, expectations and intentions. We use words
such as "anticipate," "believe," "expect," future" and "intend" and similar
expressions to identify forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks factors described below and elsewhere in this
report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this report.

                              RISKS RELATED TO DUSA

WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL SIGNIFICANTLY HIGHER QUANTITIES OF OUR
PRODUCTS.

NICOMIDE(R) WILL LIKELY LOSE SIGNIFICANT MARKET SHARE IN ANOTHER GENERIC PRODUCT
ENTERS THE MARKET AND OUR ABILITY TO BECOME PROFITABLE WILL BE MORE DIFFICULT

     In March 2006, we acquired Nicomide(R), in connection with our merger with
Sirius Laboratories, Inc. Shortly after the closing of the merger, we became
engaged in patent litigation with River's Edge Pharmaceuticals, LLC, or River's
Edge, a company that launched a niacinamide-based product in competition with
our Nicomide(R) product. River's Edge has also requested that the United States
Patent and Trademark Office reexamine the Nicomide(R) patent claiming that it is
invalid. The USPTO accepted the application for reexamination of the patent and
the parties have submitted their responses to the first office action.
Nicomide(R) sales were adversely impacted throughout the litigation process and
had a material negative impact on our revenues, results of operations and
liquidity. On October 28, 2007, we entered into a settlement and mutual release
agreement, or settlement agreement, to dismiss the lawsuit brought by DUSA
against River's Edge, asserting a number of claims arising out of River's Edge's
alleged infringement of U.S. Patent No. 6,979,468 under which DUSA has marketed,
distributed and sold Nicomide(R). Under the terms of the settlement agreement,
River's Edge unconditionally acknowledges the


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<PAGE>

validity and enforceability of the Nicomide(R) patent. River's Edge has made a
lump-sum settlement payment to DUSA in the amount of $425,000 for damages and
will pay to DUSA a per unit amount for every bottle of NIC 750 above a certain
number of units that is substituted for Nicomide(R) after September 30, 2007.
River's Edge shall be responsible for all returns of NIC 750 from the
distribution chain and/or order its destruction and will immediately cease the
manufacture, distribution and sale of NIC 750. River's Edge is obligated to
withdraw and cease participating in the re-examination of the Nicomide(R) patent
and has consented to the return to us of the $750,000 bond that is currently
being held by the court with all accrued interest.

     If another company launches a substitutable niacinamide product, or if the
USPTO finds that the Nicomide(R) patent is invalid, our revenues from sales of
Nicomide(R) will decrease, perhaps permanently, and our ability to become
profitable will be more difficult.

ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES
AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.

     The manufacture and marketing of our products are subject to continuing FDA
review as well as comprehensive regulation by the FDA and by state and local
regulatory authorities. These laws require, among other things:

     -    approval of manufacturing facilities, including adherence to good
          manufacturing and laboratory practices during production and storage,

     -    controlled research and testing of some of these products even after
          approval, and

     -    control of marketing activities, including advertising and labeling.

     If we, or any of our contract manufacturers, fail to comply with these
requirements, we may be limited in the jurisdictions in which we are permitted
to sell our products. Additionally, if we or our manufacturers fail to comply
with applicable regulatory approval requirements, a regulatory agency may also:

     -    send us warning letters,

     -    impose fines and other civil penalties on us,

     -    seize our products,

     -    suspend our regulatory approvals,

     -    cease the manufacture of our products

     -    refuse to approve pending applications or supplements to approved
          applications filed by us,

     -    refuse to permit exports of our products from the United States,

     -    require us to recall products,

     -    require us to notify physicians of labeling changes and/or product
          related problems,

     -    impose restrictions on our operations, and/or

     -    criminally prosecute us.


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<PAGE>

     We and our manufacturers must continue to comply with cGMP and Quality
System Regulation, or QSR, and equivalent foreign regulatory requirements. The
cGMP requirements govern quality control and documentation policies and
procedures. In complying with cGMP and foreign regulatory requirements, we and
our third-party manufacturers will be obligated to expend time, money and effort
in production, record keeping and quality control to assure that our products
meet applicable specifications and other requirements.

     Certain of the products acquired in connection with the Sirius merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications
including Nicomide(R). The FDA regulates such products under its marketed
unapproved drugs compliance policy guide entitled, "Marketed New Drugs without
Approved NDAs or ANDAs." Under this policy, the FDA recognizes that certain
unapproved products, based on the introduction date of their active ingredients
and the lack of safety concerns, have been marketed for many years and, at this
time, will not be the subject of any enforcement action. The FDA has recently
taken a more proactive role and is strongly encouraging manufacturers of such
products to submit applications to obtain marketing approval and we have begun
discussions with the FDA to begin that process. The FDA's enforcement discretion
policy does not apply to drugs or firms that may be in violation of regulatory
requirements other than preapproval submission requirements and the FDA may
bring an action against a drug or a firm when the FDA concludes that such other
violations exist. The contract manufacturer of Nicomide(R) has received notice
that the FDA considers prescription dietary supplements to be unapproved new
drugs that are misbranded and that cannot be legally marketed, and has received
notice that the FDA believes Nicomide(R) could not be marketed as a dietary
supplement with its current labeling. We believe that the cGMP issues do not
directly involve Nicomide. There can be no assurance that the FDA will continue
this policy or not take a contrary position with Nicomide(R). If the FDA were to
take further action,, we believe that we may be required to make certain
labeling changes and market Nicomide(R) as an over-the-counter product or as a
dietary supplement under applicable legislation, or withdraw the product from
the market, unless and until we submit a marketing application and obtain FDA
marketing approval. Any such action by the FDA could have a material impact on
our Non-PDT Drug Product revenues. Label changes eliminating claims of certain
medicinal benefits could make it more difficult to market these products and
could therefore, negatively affect our revenues and profits.

     Manufacturing facilities are subject to ongoing periodic inspection by the
FDA, including unannounced inspections. We cannot guarantee that our third-party
supply sources, or our own Kerastick(R) facility, will continue to meet all
applicable FDA regulations. If we, or any of our manufacturers, including
without limitation, the manufacturer of Nicomide(R), who has received warning
letters from the FDA, fail to maintain compliance with FDA regulatory
requirements, it would be time consuming and costly to remedy the problem(s) or
to qualify other sources. These consequences could have a significant adverse
effect on our financial condition and operations.

     As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we were
required to conduct two Phase IV follow-up studies. We successfully completed
the first study; and submitted our final report on the second study to the FDA
in January 2004. The FDA could request additional information and/or studies.
Additionally, if previously unknown problems with the product, a manufacturer or
its facility are discovered in the future, changes in product labeling
restrictions or withdrawal of the product from the market may occur. We have
implemented changes in our marketing materials due to the warning letter we
recently received from the FDA. This letter caused us to cease using a good
portion of our marketing materials which made the selling effort of our
Levulan(R) Kerastick(R) more difficult. If we receive other warning letters, our
revenues may suffer.

PATENT LITIGATION IS EXPENSIVE AND WE MAY NOT BE ABLE TO AFFORD THE COSTS.

     The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-parties may


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<PAGE>

infringe one or more of our patents, and we are spending significant resources
to enforce our patent rights. Also, in a lawsuit against a third-party for
infringement of our patents in the United States, that third-party may challenge
the validity of our patent(s). We cannot guarantee that a third-party will not
claim, with or without merit, that our patents are not valid, as in the case
described below, or that we have infringed their patent(s) or misappropriated
their proprietary material. Defending these types of legal actions involve
considerable expense and could negatively affect our financial results.

     Additionally, if a third-party were to file a United States patent
application in the United States, or be issued a patent claiming technology also
claimed by us in a pending United States application(s), we may be required to
participate in interference proceedings in the United States Patent and
Trademark Office to determine the priority of the invention. A third-party could
also request the declaration of a patent interference between one of our issued
United States patents and one of its patent applications. Any interference
proceedings likely would require participation by us and/or PARTEQ, could
involve substantial legal fees and result in a loss or lessening of our patent
protection.

     On April 20, 2006, we filed a patent infringement suit in the United States
District Court in Trenton, New Jersey alleging that River's Edge's
niacinamide-based product infringed our United States Patent No. 6,979,468.
River's Edge requested that the United States Patent and Trademark Office
reexamine the patent. Although we have now settled the litigation, if we do not
ultimately prevail in in the reexamination process, our revenues from sales of
Nicomide(R) will decrease permanently.

     During 2005 and 2006, we filed several lawsuits against chemical suppliers,
compounding pharmacies, a light device company, its distributor and a sales
representative, and physicians alleging violations of patent law. In the lawsuit
with a chemical supplier that is in progress, the defendant has filed an answer
and counterclaim alleging that the patents we license from PARTEQ are invalid.
While we have been successful in obtaining a default judgment against one
compounding pharmacy, and settled other suits favorably to us, we do not know
whether these lawsuits will prevent others from infringing our patents or
whether we will be successful in stopping these activities which we believe are
negatively affecting our revenues.

IF PRODUCT SALES DO NOT INCREASE SIGNIFICANTLY WE MAY NOT BE ABLE TO ADVANCE
DEVELOPMENT OF OUR OTHER POTENTIAL PRODUCTS AS QUICKLY AS WE WOULD LIKE TO,
WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW POTENTIAL PRODUCTS.

     If we do not generate sufficient revenues from our approved products, we
may be forced to delay or abandon some or all of our product development
programs. The pharmaceutical development and commercialization process is time
consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition. Without sufficient product sales, we
would need alternative sources of funding. There is no guarantee that adequate
funding sources could be found to continue the development of all our potential
products. We might be required to commit substantially greater capital than we
have available to research and development of such products and we may not have
sufficient funds to complete all or any of our development programs.

IF WE ARE UNABLE TO OBTAIN THE NECESSARY CAPITAL TO FUND OUR OPERATIONS, WE WILL
HAVE TO DELAY OUR DEVELOPMENT PROGRAMS AND MAY NOT BE ABLE TO COMPLETE OUR
CLINICAL TRIALS.

     While we recently completed a private placement raising net proceeds of
approximately $10.3 million, we may need substantial additional funds to fully
develop, manufacture, market and sell our other potential products. We may
obtain funds through other public or private financings, including equity
financing, and/or through collaborative arrangements. We cannot predict whether
any additional financing will be available at all or on acceptable terms.
Depending on the extent of available funding, we may delay, reduce in scope or
eliminate some of our research and development programs. We may also choose to
license rights to third parties to commercialize products or technologies that
we would otherwise have attempted to develop and commercialize on our own which
could reduce our potential revenues.


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<PAGE>

     The availability of additional capital to us is uncertain. There can be no
assurance that additional funding will be available to us on favorable terms, if
at all. Any equity financing, if needed, would likely result in dilution to our
existing stockholders and debt financing, if available, would likely involve
significant cash payment obligations and include restrictive covenants that
restrict our ability to operate our business. Failure to raise capital if needed
could materially adversely impact our business, our financial condition, results
of operations and cash flows.

SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE
KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE MANUFACTURE
OF LEVULAN(R), THE BLU-U(R), NICOMIDE(R), NICOMIDE-T(R), METED(R), PSORIACAP(R)
AND PSORIATEC(R), ANY SUPPLY OR MANUFACTURING PROBLEMS COULD NEGATIVELY IMPACT
OUR SALES.

     If we experience problems producing Levulan(R) Kerastick(R) units in our
facility, or if any of our contract suppliers fail to supply our requirements
for products, our business, financial condition and results of operations would
suffer. Although we have received approval by the FDA to manufacture the
BLU-U(R) and the Levulan(R) Kerastick(R) in our Wilmington, Massachusetts
facility, at this time, with respect to the BLU-U(R), we expect to utilize our
own facility only as a back-up to our current third party manufacturer or for
repairs.

     The sole supplier of Nicomide(R) has received warning letters from the FDA
regarding certain regulatory observations. The primary observations noted in the
warning letters were not related to Nicomide(R). However, with respect to
Nicomide(R) and certain other products manufactured by this supplier, the FDA
also notified the manufacturer that the FDA believes that Nicomide(R) could not
be marketed as a dietary supplement with its current labeling. The FDA regulates
such products under the compliance policy guide described above entitled,
"Marketed New Drugs without Approved NDAs or ANDAs."

     Nicomide(R) is one of the key products DUSA acquired from Sirius in
connection with our merger completed in March, 2006. Nicomide(R) is an oral
prescription vitamin supplement. If the FDA is not satisfied with the response
to the warning letters issued to the manufacturer of Nicomide(R) and causes the
manufacturer to cease operations, our revenues will be significantly negatively
affected.

     We have recently been advised that the sole manufacturer of our product,
Psoriatec(R), may have produced batches that are not meeting stability
specifications. We are currently conducting testing of these batches and may
have to recall the product that is in the distribution channel which will impact
our sales of this product. We do not expect the costs of the potential recall,
if any, to be material. The license agreement for Psoriatec expires January 31,
2008 and we do not intend to renew the license.

     Manufacturers and their subcontractors often encounter difficulties when
commercial quantities of products are manufactured for the first time, or large
quantities of new products are manufactured, including problems involving:

     -    product yields,

     -    quality control,

     -    component and service availability,

     -    compliance with FDA regulations, and

     -    the need for further FDA approval if manufacturers make material
          changes to manufacturing processes and/or facilities.

     We cannot guarantee that problems will not arise with production yields,
costs or quality as we and our suppliers seek to increase production. Any
manufacturing problems could delay or limit our


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<PAGE>

supplies which would hinder our marketing and sales efforts. If our facility,
any facility of our contract manufacturers, or any equipment in those facilities
is damaged or destroyed, we may not be able to quickly or inexpensively replace
it. Likewise, if there are any quality or supply problems with any components or
materials needed to manufacturer our products, we may not be able to quickly
remedy the problem(s). Any of these problems could cause our sales to suffer.

WE HAVE ONLY LIMITED EXPERIENCE MARKETING AND SELLING PHARMACEUTICAL PRODUCTS
AND, AS A RESULT, OUR REVENUES FROM PRODUCT SALES MAY SUFFER.

     If we are unable to successfully market and sell sufficient quantities of
our products, revenues from product sales will be lower than anticipated and our
financial condition may be adversely affected. We are responsible for marketing
our products in the United States and the rest of the world, except Canada,
Latin America and parts of Asia, where we have distributors. We are doing so
without the experience of having marketed pharmaceutical products prior to 2000.
In October 2003, DUSA began hiring a small direct sales force and we increased
the size of our sales force to market our products in the United States. In
addition, our sales personnel have only recently begun to sell and market the
products we acquired in our merger with Sirius. If our sales and marketing
efforts fail, then sales of the Levulan(R) Kerastick(R), the BLU-U(R),
Nicomide(R) and other products will be adversely affected.

IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR PRODUCT SALES MAY
SUFFER.

     Without adequate levels of reimbursement by government health care programs
and private health insurers, the market for our Levulan(R) Kerastick(R) for AK
therapy will be limited. While we continue to support efforts to improve
reimbursement levels to physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not
successful, a broader adoption of our therapy and sales of our products could be
negatively impacted. Although positive reimbursement changes related to AK were
made in 2005 and 2006, some physicians still believe that reimbursement levels
do not fully reflect the required efforts to routinely execute our therapy in
their practices.

     If insurance companies do not cover, or stop covering products which are
covered, including Nicomide(R), our sales could be dramatically reduced.

THE COMMERCIAL SUCCESS OF ANY PRODUCTS THAT WE MAY DEVELOP WILL DEPEND UPON THE
DEGREE OF MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS, PATIENTS, HEALTH
CARE PAYORS, PRIVATE HEALTH INSURERS AND THE MEDICAL COMMUNITY.

     Our ability to commercialize any products that we may develop will be
highly dependent upon the extent to which these products gain market acceptance
among physicians, patients, health care payors, such as Medicare and Medicaid,
private health insurers, including managed care organizations and group
purchasing organizations, and the medical community. If these products do not
achieve an adequate level of acceptance, we may not generate material product
revenues, and we may not become profitable. The degree of market acceptance of
our product candidates, if approved for commercial sale, will depend on a number
of factors, including:

     -    the effectiveness, or perceived effectiveness, of our products in
          comparison to competing products;

     -    the existence of any significant side effects, as well as their
          severity in comparison to any competing products;

     -    potential advantages over alternative treatments;

     -    the ability to offer our products for sale at competitive prices;


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<PAGE>

     -    relative convenience and ease of administration;

     -    the strength of marketing and distribution support; and

     -    sufficient third-party coverage or reimbursement.

WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES

     We have a history of operating losses. We expect to have continued losses
until sales of our products increase substantially. We incurred net losses of
$1,878,000 and $7,726,000 for the three and nine-month periods ended September
30, 2007, respectively. As of September 30, 2007, our accumulated deficit was
approximately $128,613,000. We cannot predict whether any of our products will
achieve significant enough market acceptance or generate sufficient revenues to
enable us to become profitable on a sustainable basis.

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, TRADE SECRETS OR
KNOW-HOW, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS PROFITABLY.

WE HAVE LIMITED PATENT PROTECTION AND IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO DEVELOP SIMILAR PRODUCTS TO
COMPETE WITH OUR PRODUCTS AND TECHNOLOGY.

     Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no compound
patent protection for our Levulan(R) brand of the compound ALA. Our basic ALA
patents are for methods of detecting and treating various diseased tissues using
ALA (or related compounds called precursors), in combination with light. We own
or exclusively license ALA patents and patent applications related to the
following:

     -    methods of using ALA and its unique physical forms in combination with
          light,

     -    compositions and apparatus for those methods, and

     -    unique physical forms of ALA.

     We have limited ALA patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only six foreign countries, and
certain countries under the European Patent Convention. Even where we have
patent protection, there is no guarantee that we will be able to enforce our
patents. Additionally, enforcement of a given patent may not be practicable or
an economically viable alternative.

     Some of the indications for which we may develop PDT therapies may not be
covered by the claims in any of our existing patents. Even with the issuance of
additional patents to DUSA, other parties are free to develop other uses of ALA,
including medical uses, and to market ALA for such uses, assuming that they have
obtained appropriate regulatory marketing approvals. ALA in the chemical form
has been commercially supplied for decades, and is not itself subject to patent
protection. There are reports of third-parties conducting clinical studies with
ALA in countries outside the United States where PARTEQ, the licensor of our ALA
patents, does not have patent protection. In addition, a number of third-parties
are seeking patents for uses of ALA not covered by our patents. These other
uses, whether patented or not, and the commercial availability of ALA, could
limit the scope of our future operations because ALA products could come on the
market which would not infringe our patents but would compete with our
Levulan(R) products even though they are marketed for different uses.

     Nicomide(R) is covered by a United States patent which issued in December
2005. River's Edge Pharmaceuticals, LLC filed an application with the U.S.
Patent and Trademark Office, or USPTO, for the


                                       50
<PAGE>

reexamination of the patent. The USPTO accepted the application for
reexamination of the patent and the parties have submitted their responses to
the first office action. If the USPTO finds that the patent is invalid, generic
products will be able to lawfully compete with Nicomide(R). Also, recently two
new products have been launched that could compete with Nicomide(R). These
events could cause us to lose significant revenues and put our ability to be
profitable at risk.

     Furthermore, PhotoCure received FDA approval to market Metvixia(R) for
treatment of AKs in July 2004 and this product, which would be directly
competitive with our Levulan(R) Kerastick(R) product, could be launched at any
time. While we are entitled to royalties from PhotoCure on its net sales of
Metvixia(R), this product which will be marketed in the U.S. by a large
dermatology company, may adversely affect our ability to maintain or increase
our Levulan(R) market.

     While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:

     -    these persons or entities might breach the agreements,

     -    we might not have adequate remedies for a breach, and/or

     -    our competitors will independently develop or otherwise discover our
          trade secrets;

all of which could negatively impact our ability to be profitable.

WE HAVE ONLY 3 THERAPIES THAT HAVE RECEIVED REGULATORY APPROVAL OR CLEARANCE AND
WE CANNOT PREDICT WHETHER WE WILL EVER DEVELOP OR COMMERCIALIZE ANY OTHER
LEVULAN(R) PRODUCTS.

OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RESULT
IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.

     To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our products. Except
for Levulan(R) PDT for AKs, the BLU-U(R) for acne, the ClindaReach(TM) pledget
and the currently marketed products we acquired in our merger with Sirius, all
of our other potential Levulan(R) and other potential product candidates are at
an early stage of development and subject to the risks of failure inherent in
the development of new pharmaceutical products and products based on new
technologies. These risks include:

     -    delays in product development, clinical testing or manufacturing,

     -    unplanned expenditures in product development, clinical testing or
          manufacturing,

     -    failure in clinical trials or failure to receive regulatory approvals,

     -    emergence of superior or equivalent products,

     -    inability to market products due to third-party proprietary rights,
          and

     -    failure to achieve market acceptance.

     We cannot predict how long the development of our investigational stage
products will take or whether they will be medically effective. We cannot be
sure that a successful market will continue to develop for our Levulan(R) drug
technology.


                                       51

<PAGE>

WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS BEFORE WE
CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.

     All of our potential Levulan(R) products will require the approval of the
FDA before they can be marketed in the United States. If we fail to obtain the
required approvals for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can
be filed, a product must undergo, among other things, extensive animal testing
and human clinical trials. The process of obtaining FDA approvals can be
lengthy, costly, and time-consuming. Following the acceptance of an NDA, the
time required for regulatory approval can vary and is usually 1 to 3 years or
more. The FDA may require additional animal studies and/or human clinical trials
before granting approval. Our Levulan(R) PDT products are based on relatively
new technology. To the best of our knowledge, the FDA has approved only 3 drugs
for use in photodynamic therapy, including Levulan(R)). This factor may lengthen
the approval process. We face much trial and error and we may fail at numerous
stages along the way.

     We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
photodetection, known as PD, is safe and effective for any new use we are
studying. In addition, delays or disapprovals may be encountered based upon
additional governmental regulation resulting from future legislation or
administrative action or changes in FDA policy. During September 2005, the FDA
issued guidance for the pharmaceutical industry regarding the development of new
drugs for acne vulgaris treatment. We are developing Levulan(R) PDT for acne. We
have received comments on our acne development program from the FDA statistical
reviewer assigned to our investigational new drug application or IND. In this
letter, the reviewer stated concern about whether we will have sufficient data
to select an appropriate dosing regimen for Phase III trials. We believe that we
have the data to indicate that sufficient drug dose ranging has been done;
however, if the FDA does not accept our rationale, additional clinical trials
and/or formulation development work may be required for the acne development
program, which may extend the expected development time lines for such program.
The FDA may issue additional guidance in the future, which may result on
additional costs and delays. We must also obtain foreign regulatory clearances
before we can market any potential products in foreign markets. The foreign
regulatory approval process includes all of the risks associated with obtaining
FDA marketing approval and may impose substantial additional costs.

     Certain of the products acquired in connection with the Sirius merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications
including Nicomide(R). FDA regulates such products under its marketed unapproved
drugs compliance policy guide entitled, "Marketed New Drugs without Approved
NDAs or ANDAs." Under this policy, FDA recognizes that certain unapproved
products, based on the introduction date of their active ingredients and the
lack of safety concerns, have been marketed for many years and, at this time,
will not be the subject of any enforcement action. The FDA has recently taken a
more proactive role and is strongly encouraging manufacturers of such products
to submit applications to obtain marketing approval and we have begun
discussions with FDA to begin that process. FDA's enforcement discretion policy
does not apply to drugs or firms that may be in violation of regulatory
requirements other than preapproval submission requirements and FDA may bring an
action against a drug or a firm when FDA concludes that such other violations
exist. The contract manufacturer of Nicomide(R) has received notice that the FDA
considers prescription dietary supplements to be unapproved new drugs that are
misbranded and that cannot be legally marketed, and has received notice that the
FDA believes Nicomide could not be marketed as a dietary supplement with its
current labeling. We believe that the cGMP issues do not directly involve
Nicomide(R). There can be no assurance that the FDA will continue this policy or
not take a contrary position with Nicomide(R). If the FDA were to take further
action, we believe that we may be required to make certain labeling changes and
market Nicomide(R) as over-the-counter product or as a dietary supplement under
applicable legislation, or withdraw the product from the market, unless and
until we submit a marketing application and obtain FDA marketing approval.


                                       52

<PAGE>

BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT
TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.

     We are a small company with only 86 employees, including 4 part-time
employees as of September 30, 2007. We are highly dependent on several key
officer/employees with specialized scientific and technical skills without whom
our business, financial condition and results of operations would suffer,
especially in the photodynamic therapy portion of our business. The photodynamic
therapy industry is still quite small and the number of experts is limited. The
loss of these key employees could cause significant delays in achievement of our
business and research goals since very few people with their expertise could be
hired. Our growth and future success will depend, in large part, on the
continued contributions of these key individuals as well as our ability to
motivate and retain other qualified personnel in our specialty drug and light
device areas.

COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND CHANGE.

     We work with scientific and clinical advisors and collaborators at academic
and other institutions that assist us in our research and development efforts.
These scientists and advisors are not our employees and may have other
commitments that limit their availability to us. Although our advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators
sign agreements not to disclose our confidential information, it is possible
that valuable proprietary knowledge may become publicly known through them.

                          RISKS RELATED TO OUR INDUSTRY

PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.

WE ARE SUBJECT TO RISK FROM POTENTIAL PRODUCT LIABILITY LAWSUITS WHICH COULD
NEGATIVELY AFFECT OUR BUSINESS.

     The development, manufacture and sale of medical products expose us to
product liability claims related to the use or misuse of our products. Product
liability claims can be expensive to defend and may result in significant
judgments against us. A successful claim in excess of our insurance coverage
could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability
insurance coverage will be available in the future at acceptable costs. If the
cost is too high, we may have to self-insure.

OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT COSTS
COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.

     We have used various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. We are subject to federal,
state and local laws and regulations which govern the use, manufacture, storage,
handling and disposal of hazardous materials and specific waste products. Now
that we have established our own production line for the manufacture of the
Kerastick(R), we are subject to additional environmental laws and regulations.
we believe that we are in compliance in all material respects with currently
applicable environmental laws and regulations. However, we cannot guarantee that
we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely affect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.


                                       53

<PAGE>

WE MAY NOT BE ABLE TO COMPETE AGAINST TRADITIONAL TREATMENT METHODS OR KEEP UP
WITH RAPID CHANGES IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES THAT COULD
MAKE SOME OR ALL OF OUR PRODUCTS NON-COMPETITIVE OR OBSOLETE.

COMPETING PRODUCTS AND TECHNOLOGIES BASED ON TRADITIONAL TREATMENT METHODS MAY
MAKE SOME OR ALL OF OUR PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR
OBSOLETE.

     Well-known pharmaceutical, biotechnology and medical device companies are
marketing well-established therapies for the treatment of many of the same
conditions that we are seeking to treat, including AKs, acne, rosacea, and
Barrett's Esophagus. Doctors may prefer to use familiar methods, rather than
trying our products. Reimbursement issues affect the economic competitiveness of
our products as compared to other more traditional therapies.

     Many companies are also seeking to develop new products and technologies,
and receiving approval for medical conditions for which we are developing
treatments. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in
developing products that are safer or more effective than ours. Many of our
competitors have substantially greater financial, technical and marketing
resources than we have. In addition, several of these companies have
significantly greater experience than we do in developing products, conducting
preclinical and clinical testing and obtaining regulatory approvals to market
products for health care.

     We cannot guarantee that new drugs or future developments in drug
technologies will not have a material adverse effect on our business. Increased
competition could result in:

     -    price reductions,

     -    lower levels of third-party reimbursements,

     -    failure to achieve market acceptance, and

     -    loss of market share, any of which could adversely affect our
          business. Further, we cannot give any assurance that developments by
          our competitors or future competitors will not render our technology
          obsolete.

     On May 30, 2006, we entered into a patent license agreement with PhotoCure
ASA whereby DUSA granted a non-exclusive license to PhotoCure under the patents
DUSA licenses from PARTEQ, the licensing arm of Queens University, Kingston,
Ontario Canada for esters of aminolevulinic acid ("ALA"). ALA is the active
ingredient in DUSA's Levulan(R) products. Furthermore, DUSA granted a
non-exclusive license to PhotoCure for its existing formulations of its
Hexvix(R) and Metvix(R) (known in the United States as Metvixia(R)) products for
any DUSA patents that may issue or be licensed by DUSA in the future. PhotoCure
received FDA approval to market Metvixia for treatment of AKs in July 2004 and
it would be directly competitive with our Levulan(R) Kerastick(R) product should
PhotoCure decide to begin marketing this product. While we are entitled to
royalties from PhotoCure on its net sales of Metvixia, this product, which will
be marketed in the U.S. by a large dermatology company which may start to market
Metvixia at any time, would adversely affect our ability to maintain or increase
our market.

WE HAVE LEARNED THAT SOME COMPOUNDING PHARMACIES ARE PRODUCING A FORM OF
AMINOLEVULINIC ACID HCL AND ARE MARKETING IT TO THE MEDICAL COMMUNITY.

     We are aware that there are compounding pharmacies that market compounded
versions of aminolevulinic acid HCl as an alternative to our Levulan(R) product.
Since December 2004, we filed lawsuits against some compounding pharmacies and
physicians alleging violations of the Lanham Act for false advertising and
trademark infringement, and of United States patent law. All of the lawsuits
that have been concluded settled favorably to us. More recently, we have sued
chemical suppliers, and a light


                                       54

<PAGE>

device company, its distributor and a sales representative, alleging that they
induce physicians to infringe patents licensed to us, among other things. While
we believe that certain actions of compounding pharmacies and others go beyond
the activities which are permitted under the Food, Drug and Cosmetic Act and
have advised the FDA and local health authorities of our concerns, we cannot be
certain that our lawsuits will be successful in curbing the practices of these
companies or that regulatory authorities will intervene to stop their
activities. In addition, there may be other compounding pharmacies which are
following FDA guidelines, or others conducting illegal activities of which we
are not aware, which may be negatively impacting our sales revenues.

GENERIC MANUFACTURERS MAY LAUNCH PRODUCTS AT RISK OF PATENT INFRINGEMENT

     If generic manufacturers, like River's Edge, launch products to compete
with Nicomide(R) in spite of our patent position, or if the United States Patent
and Trademark Office determines that our patent is invalid, these manufacturers
may erode our market and negatively impact our sales revenues, liquidity and
operations.

OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.

     We are aware of several companies commercializing and/or conducting
research with ALA or ALA-related compounds, including: medac GmbH and photonamic
GmbH & Co. KG (Germany); Biofrontera, PhotoTherapeutics, Inc. (U.K.) and
PhotoCure ASA (Norway) which entered into a marketing agreement with Galderma
S.A. for countries outside of Nordic countries for certain dermatology
indications. We also anticipate that we will face increased competition as the
scientific development of PDT and PD advances and new companies enter our
markets. Several companies are developing PDT agents other than Levulan(R).
These include: QLT Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc.
(U.S.); and Pharmacyclics, Inc. (U.S.). There are many pharmaceutical companies
that compete with us in the field of dermatology, particularly in the acne and
rosacea markets.

     PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the
European Union, New Zealand, Australia and countries in Scandinavia. PhotoCure's
marketing partner, a large dermatology company, could begin to market its
product in direct competition with Levulan(R) in the U.S., at any time, under
the terms of our patent license agreement and we may lose market share.

     Axcan Pharma Inc. has received FDA approval for the use of its product,
PHOTOFRIN(R), for PDT in the treatment of high grade dysplasia associated with
Barrett's Esophagus. Axcan is the first company to market a PDT therapy for this
indication for which we designed our proprietary sheath device and have
conducted pilot clinical trials.

     We expect that our principal methods of competition with other PDT products
will be based upon such factors as:

     -    the ease of administration of our method of PDT,

     -    the degree of generalized skin sensitivity to light,

     -    the number of required doses,

     -    the selectivity of our drug for the target lesion or tissue of
          interest, and

     -    the type and cost of our light systems.

     Our primary competition in the acne and rosacea markets include oral and
topical antibiotics, other topical prescription and over-the-counter products,
as well as various laser and non-laser light treatments. The market is highly
competitive and other large and small companies have more experience


                                       55

<PAGE>

than we do which could make it difficult for us to penetrate the market. We are
also aware of new products that were launched recently which will compete with
Nicomide(R) and the AVAR(R) line of products which could negatively impact our
market share. In addition, River's Edge's niacinamide-based product which
competes with our Nicomide(R) product has reentered the market, and other
generic companies may also decide to enter the market while our patent
litigation and reexamination process are proceeding, or thereafter if the court
or if the USPTO finds that our Nicomide patent is invalid. The entry of new
products from time to time would likely cause us to lose market share.

                           RISKS RELATED TO OUR STOCK

IF THE SHARES OF COMMON STOCK HELD BY FORMER SIRIUS SHAREHOLDERS OR OUR NEW
INVESTORS ARE SOLD, THE PRICE OF THE SHARES COULD BECOME DEPRESSED

     All of the shares of DUSA's common stock which were issued to the former
Sirius shareholders were subject to a lock-up provision under the terms of the
merger agreement. On March 10, 2007, the lock-up provision on 1,380,151 shares
was lifted. These shares have been registered and are freely tradable. If these
shareholders decide to sell their shares, the price of the shares on NASDAQ
could be depressed. If the shares of DUSA's common stock which were issued in
the recent private placement are sold following the effective date of the
registration statement which we are obligated to file, the price of our shares
could be depressed.

IF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ARE CONVERTED, THE VALUE OF THOSE
SHARES OF COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.

     As of September 30, 2007 there were outstanding options and warrants to
purchase 3,264,000 Shares of Common Stock, with exercise prices ranging from
U.S. $1.60 to $31.00 per share, and of CDN $6.79 per share, respectively. The
holders of the options and warrants have the opportunity to profit if the market
price for the common stock exceeds the exercise price of their respective
securities, without assuming the risk of ownership. The holders are likely to
exercise their securities when we would probably be able to raise capital from
the public on terms more favorable than those provided in these securities.

RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR SPECIALTY
PHARMACEUTICAL AND BIOTECHNOLOGY STOCKS COULD RESULT IN SUDDEN CHANGES IN THE
MARKET VALUE OF OUR STOCK.

     The price of our common stock has been highly volatile. These fluctuations
create a greater risk of capital losses for our shareholders as compared to less
volatile stocks. From January 1, 2006 to September 30, 2007, the price of our
stock has ranged from a low of $1.63 to a high of $11.12. Factors that
contributed to the volatility of our stock during this period included:

     -    quarterly levels of product sales;

     -    clinical trial results;

     -    general market conditions;

     -    patent litigation;

     -    increased marketing activities or press releases; and

     -    changes in third-party payor reimbursement for our therapy.

     The significant general market volatility in similar stage pharmaceutical
and biotechnology companies made the market price of our common stock even more
volatile.


                                       56

<PAGE>

SIGNIFICANT FLUCTUATIONS IN ORDERS FOR OUR PRODUCTS, ON A MONTHLY AND QUARTERLY
BASIS, ARE COMMON BASED ON EXTERNAL FACTORS AND SALES PROMOTION ACTIVITIES.
THESE FLUCTUATIONS COULD INCREASE THE VOLATILITY OF OUR STOCK PRICE.

     The price of our common stock may be affected by the amount of quarterly
shipments of our products to end-users. Since our PDT products are still in the
early stages of adoption, and sales volumes are still low, a number of factors
could affect product sales levels and growth rates in any period. These could
include the timing of medical conferences, sales promotion activities, and large
volume purchases by our higher usage customers. In addition, seasonal
fluctuations in the number of patients seeking treatment at various times during
the year could impact sales volumes. These factors could, in turn, affect the
volatility of our stock price.

EFFECTING A CHANGE OF CONTROL OF DUSA WOULD BE DIFFICULT, WHICH MAY DISCOURAGE
OFFERS FOR SHARES OF OUR COMMON STOCK.

     Our certificate of incorporation authorizes the board of directors to issue
up to 100,000,000 shares of stock, 40,000,000 of which are common stock. The
board of directors has the authority to determine the price, rights, preferences
and privileges, including voting rights, of the remaining 60,000,000 shares
without any further vote or action by the shareholders. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future.

     On September 27, 2002, we adopted a shareholder rights plan at a special
meeting of DUSA's board of directors. The rights plan could discourage, delay or
prevent a person or group from acquiring 15% or more of our common stock,
thereby limiting, perhaps, the ability of our shareholders to benefit from such
a transaction.

     The rights plan provides for the distribution of one right as a dividend
for each outstanding share of our common stock to holders of record as of
October 10, 2002. Each right entitles the registered holder to purchase one
one-thousandths of a share of preferred stock at an exercise price of $37.00 per
right. The rights will be exercisable subsequent to the date that a person or
group either has acquired, obtained the right to acquire, or commences or
discloses an intention to commence a tender offer to acquire, 15% or more of our
outstanding common stock or if a person or group is declared an "Adverse
Person", as such term is defined in the rights plan. The rights may be redeemed
by DUSA at a redemption price of one one-hundredth of a cent per right until ten
days following the date the person or group acquires, or discloses an intention
to acquire, 15% or more, as the case may be, of DUSA, or until such later date
as may be determined by the our board of directors.

     Under the rights plan, if a person or group acquires the threshold amount
of common stock, all holders of rights (other than the acquiring person or
group) may, upon payment of the purchase price then in effect, purchase shares
of common stock of DUSA having a value of twice the purchase price. In the event
that we are involved in a merger or other similar transaction where DUSA is not
the surviving corporation, all holders of rights (other than the acquiring
person or group) shall be entitled, upon payment of the purchase price then in
effect, to purchase common stock of the surviving corporation having a value of
twice the purchase price. The rights will expire on October 10, 2012, unless
previously redeemed. Our board of directors has also adopted certain amendments
to DUSA's certificate of incorporation consistent with the terms of the rights
plan.


                                       57

<PAGE>

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     None.

ITEM 5. OTHER INFORMATION.

     None.


                                       58

<PAGE>

ITEM 6. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO.   DESCRIPTION OF EXHIBIT
-----------   ------------------------------------------------------------------
<S>           <C>
10(a)         Amendment to the Marketing, Distribution and Supply Agreement
              dated September 26, 2007, between the Company and Stiefel
              Laboratories, Inc. portions of which have been omitted pursuant to
              a request for confidential treatment pursuant to Rule 24b-2 of the
              Securities Exchange Act of 1934, as amended.

31(a)         Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
              Securities Exchange Act of 1934.

31(b)         Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
              Securities Exchange Act of 1934.

32(a)         Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)         Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1          Press Release dated November 9, 2007
</TABLE>


                                       59

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        DUSA Pharmaceuticals, Inc.


Date: November 9, 2007                  By: /s/ Robert F. Doman
                                            ------------------------------------
                                            Robert Doman
                                            President and Chief
                                            Executive Officer
                                            (principal executive officer)


Date: November 9, 2007                  By: /s/ Richard C. Christopher
                                            ------------------------------------
                                            Richard C. Christopher
                                            Vice President, Finance and Chief
                                            Financial Officer
                                            (principal financial officer)


                                       60

<PAGE>

                                  EXHIBIT INDEX

10(a)   Amendment to the Marketing, Distribution and Supply Agreement dated
        September 26, 2007, between the Company and Stiefel Laboratories, Inc.
        portions of which have been omitted pursuant to a request for
        confidential treatment pursuant to Rule 24b-2 of the Securities
        Exchange Act of 1934, as amended.

31(a)   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
        Exchange Act of 1934.

31(b)   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
        Exchange Act of 1934.

32(a)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1    Press Release dated November 9, 2007


                                       61